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Appendices

The purpose of this appendix is to provide detailedinformation on specific instruments and transactionsand to set out their classification treatment in thegross external debt position. There are two sections.The first provides a description of specific financialinstruments and how they should be classified in thegross external debt position; the second sets out theclassification treatment of some specific transac-tions that, experience suggests, require particularclarification.

Part 1. Financial Instruments:Description and Classification in theGross External Debt Position1

A

American Depository Receipt (ADR)

An ADR is a negotiable certificate that representsownership of the securities of a non-U.S. residentcompany. Although the securities underlying ADRscan be debt or money market instruments, the largemajority are equities. An ADR allows a non-U.S.resident company to introduce its equity into theU.S. market in a form more readily acceptable toU.S. investors, such as in U.S. dollars, withoutneeding to disclose all the information normallyrequired by the U.S. Securities and Exchange Com-mission. A U.S. depository bank will purchase theunderlying foreign security and then issue receiptsin dollars for those securities to the U.S. investor.The receipts are registered. The investor canexchange the ADRs for the underlying security atany time. See also Bearer Depository Receipts andDepository Receipts.

Classification

These instruments are classified by the nature of theunderlying instrument backing the ADR. This isbecause the “issuing” intermediary does not take theunderlying security onto its balance sheet but sim-ply acts as a facilitator. So, the debtor is the issuerof the underlying security—that is, an ADR isregarded as a non-U.S. resident issue. If owned bynonresidents, these instruments are to be included inthe gross external debt position if the underly-ing security is a debt security. The security is classi-fied as long-term, bonds and notes (debt securities,portfolio investment in the IIP) or, depending onthe relationship between debtor and creditor, asdirect investment, intercompany lending (see thedescription of direct investment in Chapter 3). Ifthe underlying item is an equity investment itshould be classified in the memorandum item,equity liabilities.

Arrears

Amounts that are past due-for-payment and unpaid.These include amounts of scheduled debt-servicepayments that have fallen due but have not been paidto the creditor(s).

In the context of the Paris Club, arrears are theunpaid amounts that fall due before the consolida-tion period. See Paris Club, Creditor, and Consoli-dation Period in Appendix III.

Classification

Arrears of principal and/or interest are reported asnew short-term liabilities. If owned by nonresidents,these new instruments are to be included in the grossexternal debt position as arrears. Regarding theoriginal borrowing, the debt outstanding is to bereported as though the principal and interest werepaid on schedule.

Appendix I. Specific Financial Instrumentsand Transactions: Classifications

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1This appendix has drawn significantly upon the Bank of England(1998), Financial Terminology Database.

External Debt Statistics Guide

Asset-Backed Securities

Asset-backed securities are bonds whose incomepayments and principal repayments are dependent ona pool of assets. Securities may be backed by variousassets—for example, mortgages, credit card loans,automobile loans—in effect, converting illiquidassets into tradable securities. An asset-backed secu-rity enables the original lending institution to devolvecredit risks to investors. There are several key fea-tures of asset-backed securities: the original lenderwill usually sell the assets to a trust or other form ofintermediary (special purchase vehicle) and so, in thecase of a bank, this frees “capital” that regulatoryguidelines require a bank to hold against the assets.The intermediary will finance the purchase of theassets by issuing securities. Because income and therepayment of principal are dependent on the underly-ing assets, if the underlying assets are prepaid so isthe security. Issuers often provide different tranchesof the security so that if there are prepayments, thefirst tier will be repaid first, the second tier next, etc.The pricing of the various tranches will reflect theprobability of early repayment. Asset-backed securi-ties have also been developed that securitize futureincome streams—such as the earnings of musicians.

Classification

Asset-backed securities owned by nonresidents areto be included in the gross external debt position.They should be classified as long-term, bonds andnotes (portfolio investment, debt securities in theIIP) unless they have an original maturity of oneyear or less, in which instance they are to be classi-fied as money market instruments. Alternatively,depending on the relationship between debtor andcreditor, these securities could be classified as directinvestment, intercompany lending (see the descrip-tion of direct investment in Chapter 3). These securi-ties present a special problem regardless of theamount outstanding because there can be partialrepayments of principal at any time. So, simplyrevaluing the original face value to end-period mar-ket prices will cause overvaluation of the positiondata if there has been a partial repayment.

B

Balances on Nostro and Vostro Accounts

A vostro (your) account is another bank’s accountwith a reporting bank, while a nostro (our) account isa reporting bank’s account with another bank.

Classification

Liability positions in nostro and vostro accounts areto be included in the gross external debt position.They are classified as banks, short-term, currencyand deposits, or loans (other investment in the IIP)depending on the nature of the account.

Bank Deposits

Bank deposits are claims on banks that are eithertransferable or are “other deposits.” Transferabledeposits consist of deposits that are exchangeable ondemand at par without restriction, or penalty, anddirectly usable for making payments by check, giroorder, direct debit/credit, or other payment facility.“Other deposits” comprise all claims represented byevidence of deposit—for example, savings andfixed-term deposits; sight deposits that permit imme-diate cash withdrawals but not direct third-partytransfers; and shares that are legally (or practically)redeemable on demand or on short notice in savingsand loan associations, credit unions, building soci-eties, etc.

Classification

Bank deposits are liabilities of banks and otherdepository institutions, and if owned by a nonresi-dent are to be included in the gross external debtposition. They should be classified as banks, short-term, currency and deposits (other investment in theIIP) unless detailed information is available to makethe short-term/long-term attribution.

Banker’s Acceptances

A negotiable order to pay a specified amount ofmoney on a future date, drawn on and guaranteed bya bank. These drafts are usually drawn for interna-tional trade finance purposes as an order to pay anexporter a stated sum on a specific future date forgoods received. The act of a bank stamping the word“accepted” on the draft creates a banker’s accep-tance. The acceptance represents an unconditionalclaim on the part of the owner and an unconditionalliability on behalf of the accepting bank; the bankhas a claim on the drawer, who is obliged to pay thebank the face value on or before the maturity date.By writing the word “accepted” on the face of thedraft the bank carries primary obligation, guarantee-ing payment to the owner of the acceptance.Banker’s acceptances can be discounted in the sec-

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Appendix I • Financial Instruments and Transactions: Classifications

ondary market, the discount reflecting the time tomaturity and credit quality of the guaranteeing bank.Since the banker’s acceptance carries a banker’sobligation to pay (in effect “two-name paper”) and isnegotiable, it becomes an attractive asset. Banker’sacceptances are always sold at a discount and havematurities of up to 270 days.

Classification

Banker’s acceptances are money market instrumentsthat are claims on the accepting bank, with the bankowning a claim on the issuer of the bill. As recom-mended in the 1993 SNA, flexibility in the applica-tion of this recommendation is required to takenational practices and variations in the nature ofthese instruments into account.

If owned by nonresidents, banker’s acceptancesshould be included in the gross external debt posi-tion. They should be classified as short-term, moneymarket instruments (portfolio investment, debt secu-rities in the IIP) unless they have an original matu-rity of over one year, in which instance they are to beclassified as bonds and notes. Alternatively, depend-ing on the relationship between debtor and creditor,these securities could be classified as direct invest-ment, intercompany lending (see the description ofdirect investment in Chapter 3).

Bearer Depository Receipt (BDR)

A form of depository receipt issued in bearer ratherthan registered form. See Depository Receipts.

Classification

A BDR is classified according to the nature of theunderlying instrument backing it. This is becausethe “issuing” intermediary does not take the under-lying security onto its balance sheet but simply actsas a facilitator. So, the debtor is the issuer of theunderlying security. If owned by nonresidents, theseinstruments are to be included in the gross externaldebt position. They should be classified as long-term, bonds and notes (portfolio investment, debtsecurities in the IIP) unless they have an originalmaturity of one year or less, in which instance theyare to be classified as money market instruments.Alternatively, depending on the relationshipbetween debtor and creditor, these securities couldbe classified as direct investment, intercompany

lending (see the description of direct investment inChapter 3).

Bonds and Notes

Bonds and notes are debt securities with an originalmaturity of over one year. They are usually traded(or tradable) in organized and other financial mar-kets. Bonds and notes usually give the holder theunconditional right to fixed money income or con-tractually determined variable money income. Withthe exception of perpetual bonds, bonds and notesalso provide the holder with an unconditional rightto a fixed sum as repayment of principal on a speci-fied date or dates.

Classification

Bonds and notes owned by nonresidents are to beincluded in the gross external debt position. Theyshould be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP).Alternatively, depending on the relationship betweendebtor and creditor, these securities could be classi-fied as direct investment, intercompany lending (seethe description of direct investment in Chapter 3).

Bonds with an Embedded Call Option

A bond that gives the issuer a right to buy back thebonds on or by a particular date. The value of thisright is usually reflected in the interest rate on thebond.

Classification

Bonds with embedded call options owned by nonres-idents are to be included in the gross external debtposition. They should be classified as long-term,bonds and notes (portfolio investment, debt securi-ties in the IIP) unless they have an original maturityof one year or less, in which instance they are to beclassified as money market instruments. Alterna-tively, depending on the relationship between debtorand creditor, these securities could be classified asdirect investment, intercompany lending (see thedescription of direct investment in Chapter 3).

Bonds with an Embedded Put Option

A bond whereby the creditor has the right to sellback the bonds to the issuer on or by a particular

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date, or under certain circumstance, such as a creditdownrating of the issuer. This right is usuallyreflected in the interest rate on the bond.

Classification

Bonds with embedded put options owned by nonres-idents are to be included in the gross external debtposition. They should be classified as long-term,bonds and notes (portfolio investment, debt securi-ties in the IIP) unless they have an original maturityof one year or less, in which instance they are to beclassified as money market instruments. Alterna-tively, depending on the relationship between debtorand creditor, these securities could be classified asdirect investment, intercompany lending (see thedescription of direct investment in Chapter 3). Theoption is regarded as an integral part of the bond andis not separately valued and classified.

Brady Bonds

Brady bonds, named after U.S. Treasury SecretaryNicholas Brady, arose from the Brady Plan. Thisplan was a voluntary market-based approach, devel-oped in the late 1980s, to reduce debt and debt ser-vice owed to commercial banks by a number ofemerging market countries. Brady bonds wereissued by the debtor country in exchange for com-mercial bank loans (and in some cases unpaid inter-est). In essence they provided a mechanism bywhich debtor countries could repackage existingdebt. They are dollar denominated, “issued” in theinternational markets. The principal amount is usu-ally (but not always) collateralized by speciallyissued U.S. Treasury 30-year zero-coupon bondspurchased by the debtor country using a combina-tion of IMF, World Bank, and the country’s own for-eign currency reserves. Interest payments on Bradybonds, in some cases, are guaranteed by securities ofat least double-A-rated credit quality held with theNew York Federal Reserve Bank. Brady bonds aremore tradable than the original bank loans but comein different forms. The main types are as follows.• Par bonds: Bonds issued to the same value as the

original loan, but the coupon on the bonds isbelow market rate. Principal and interest paymentsare usually guaranteed.

• Discount bonds: Bonds issued at a discount to theoriginal value of the loan, but the coupon is atmarket rate. Principal and interest payments areusually guaranteed.

• Debt-conversion bonds: Bonds issued to the samevalue as the original loan but on condition that“new” money is provided in the form of new-money bonds.

• Front-loaded interest reduction bonds: Bondsissued with low-rate fixed coupons that step upafter the first few years.

There are also other, less common types.

Classification

Brady bonds owned by nonresidents are to beincluded in the gross external debt position. Theyshould be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP).When a Brady bond is issued, the original loan isassumed to have been redeemed unless the terms ofthe issue of the Brady bond state otherwise. Anydebt reduction in nominal value terms should berecorded—see Chapter 8. The initial purchase of theprincipal collateral (U.S. Treasury bonds) is a sepa-rate transaction and is classified as debt of theUnited States.

C

Certificate of Deposit (CD)

A certificate issued by a bank acknowledging adeposit in that bank for a specified period of time at aspecified rate of interest; CDs are essentially a formof negotiable time deposit (evidenced by the certifi-cate). CDs are widely issued in the domestic andinternational markets, and are typically bearer instru-ments, issued at face value with original maturities ofone to six months, although there have been maturi-ties of up to seven years. Typically, interest costs arepayable at maturity for issues of one year or less, andsemiannually on longer issues. The rate of interest ona given CD depends on several factors: current mar-ket conditions, the denomination of the certificate,and the market standing of the bank offering it. Typi-cally, CDs are highly liquid instruments, whichallows banks access to a cheaper source of funds thanborrowing on the interbank market.

Classification

CDs owned by nonresidents are to be included in thegross external debt position. Those with an originalmaturity of one year or less should be classified as

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short-term, money market instruments (portfolioinvestment, debt securities in the IIP), while thosewith an original maturity of over one year should beclassified as bonds and notes. A small minority ofCDs are known to be nonnegotiable—not tradable—and if owned by nonresidents are to be classified asbanks, short-term, currency and deposits (otherinvestment in the IIP). Alternatively, depending onthe relationship between debtor and creditor, thesesecurities could be classified as direct investment,intercompany lending (see the description of directinvestment in Chapter 3).

Collateralized Debt Obligations (CDOs)

CDOs are bonds whose income payments and prin-cipal repayments are dependent on a pool of instru-ments. Typically, a CDO is backed by a diversifiedpool of loan and bond instruments either purchasedin the secondary market or from the balance sheet ofa commercial bank. The diversified nature of theinstruments differentiates a CDO from an asset-backed security, which is backed by a homogeneouspool of instruments, such as mortgages and creditcard loans. Because income and the repayment ofprincipal are dependent on the performance of theunderlying instruments, there is a probability ofearly repayment. Issuers are often provided with dif-ferent tranches of the security, so that if there areprepayments the first tier will be repaid first, the sec-ond tier next, etc. The pricing of each tranchereflects the probability of repayment.

Classification

CDOs owned by nonresidents are to be included inthe gross external debt position. They should beclassified as long-term, bonds and notes (portfolioinvestment, debt securities in the IIP) unless theyhave an original maturity of one year or less, inwhich instance they are to be classified as moneymarket instruments. Alternatively, depending on therelationship between debtor and creditor, these secu-rities could be classified as direct investment, inter-company lending (see the description of directinvestment in Chapter 3). These securities present aspecial problem regardless of the amount outstand-ing because there can be partial repayments of prin-cipal at any time. So, simply revaluing the originalface value to end-period market prices will causeovervaluation of the position data if there has been apartial repayment.

Commercial Paper (CP)

Commercial paper is an unsecured promise to pay acertain amount on a stated maturity date, issued inbearer form. CP enables corporations to raise short-term funds directly from end investors through theirown in-house CP sales team or via arranged placingthrough bank dealers. Short-term in nature, withmaturities ranging from overnight to one year, CP isusually sold at a discount. A coupon is paid in a fewmarkets. Typically, issue size ranges from $100,000up to about $1 billion. In bypassing financial inter-mediaries in the short-term money markets, CP canoffer a cheaper form of financing to corporations.But because of its unsecured nature, the credit qual-ity of the issuer is important for the investor. Compa-nies with a poor credit rating can obtain a higherrating for the issue by approaching their bank orinsurance company for a third-party guarantee, orperhaps issue CP under a MOF (Multiple OptionFacility), which provides a backup line of creditshould the issue be unsuccessful.

Classification

Commercial paper owned by nonresidents is to beincluded in the gross external debt position. Suchpaper should be classified as short-term, money mar-ket instruments (portfolio investment, debt securitiesin the IIP). Alternatively, depending on the relation-ship between debtor and creditor, these securitiescould be classified as direct investment, intercom-pany lending (see the description of direct invest-ment in Chapter 3). When CP is issued at a discount,this discount represents interest income.

Commodity-Linked Bonds

A bond whose redemption value is linked to theprice of a commodity. Typically, issuers whoseincome stream is closely tied to commodity earningsissue these bonds.

Classification

Bonds with payoffs linked to movements in com-modity prices and owned by nonresidents are to beincluded in the gross external debt position. Theyshould be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP)unless they have an original maturity of one year orless, in which instance they are to be classified asmoney market instruments. Alternatively, depending

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on the relationship between debtor and creditor,these securities could be classified as direct invest-ment, intercompany lending (see the description ofdirect investment in Chapter 3).

Commodity-Linked Derivatives

Derivatives whose value derives from the price of acommodity. These include:• Commodity future—traded on an organized

exchange, in which counterparties commit to buyor sell a specified amount of a commodity at anagreed contract price on a specified date;

• Commodity option—gives the purchaser the rightbut not the obligation to purchase (call) or sell (put)a specified amount of a commodity at an agreedcontract price on or before a specified date; and

• Commodity swap—a swap of two paymentstreams, where one represents a currently prevail-ing spot price and the other an agreed contractprice for a specified quantity and quality of a spec-ified commodity.

Net cash settlements are usually made.

Classification

Commodity-linked derivatives in which the counter-party is a nonresident are included indistinguishablyin the memorandum item, financial derivatives.

Convertible Bonds

A convertible bond is a fixed-rate bond that may, atthe option of the investor, be converted into theequity of the borrower or its parent. The price atwhich the bond is convertible into equity is set at thetime of issue and typically will be at a premium tothe market value of the equity at the time of issue.The conversion option on the bond may be exercisedat one specified future date or within a range ofdates—“the window period.” The conversion rightcannot be separated from the debt. The instrumentallows the investor to participate in the appreciationof the underlying asset of the company while limit-ing risk. A convertible bond will generally pay acoupon rate higher than the dividend rate of theunderlying equity at the time of issue but lower thanthe rate of a comparable bond without a conversionoption. For the investor, the value of the convertiblebond lies in the excess return of the bond yield overthe dividend yield of the underlying shares.

Classification

Convertible bonds owned by nonresidents are to beincluded in the gross external debt position. Theyshould be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP)unless they have an original maturity of one year orless, in which instance they are to be classified asmoney market instruments. Alternatively, dependingon the relationship between debtor and creditor,these securities could be classified as direct invest-ment, intercompany lending (see the description ofdirect investment in Chapter 3). As bonds are con-verted into equity, so the debt is extinguished. Theequity issued is recorded in the memorandum item,equity liabilities. If the nonresident is in a directinvestment relationship with the issuer, then theequity is classified as Direct investment in reportingeconomy: equity capital and reinvested earnings inthe memorandum item.

Credit Derivatives

Derivatives that provide a market in credit risk.Investors will use credit derivatives to gain or reduceexposure to credit risk. With a credit derivative theinvestor is taking a view on the creditworthiness ofthe issuer(s) of the underlying instrument(s) withoutnecessarily risking principal (although credit deriva-tives may be embedded in a security). For instance, acreditor may lend to a debtor but wants to protectagainst the risk of default by that debtor. The credi-tor “buys” protection in the form of a credit defaultswap—the risk premium inherent in the interest rateis swapped by the creditor for a cash payment inevent of default. Also, these instruments are used tocircumvent local investment rules; for example, if aforeign investor cannot invest in equity securitiesand so enters into a total return swap where the for-eign investor pays a reference rate, say LIBOR,against the total return—dividends and capitalgain/loss—on an equity security. The other mostcommon structure is a spread option whose payoffstructure depends on the interest rate spread betweenemerging country debt and, say, U.S. Treasurybonds.

Classification

Credit derivatives in which the counterparty is a non-resident are included indistinguishably in the memo-randum item, financial derivatives.

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Credit-Linked Note

A so-called structured security that combines acredit derivative and a regular bond.

Classification

Credit-linked notes owned by nonresidents are to beincluded in the gross external debt position. Theyshould be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP).Alternatively, depending on the relationship betweendebtor and creditor, these securities could be classi-fied as direct investment, intercompany lending(see the description of direct investment in Chapter 3).The credit derivative is regarded as an integral part ofthe bond and is not separately valued and classified.

Currency

Currency consists of notes and coin that are in circu-lation and commonly used to make payments.

Classification

Domestic currency owned by nonresidents isincluded within the gross external debt position asmonetary authorities (or perhaps banks), short-term,currency and deposits (other investment in the IIP).

Currency-Linked Bonds

A bond in which the coupon and/or redemptionvalue are linked to the movement in an exchangerate. Examples of these types of bonds were thetesobonos issued by Mexican banks in 1994. Thesebonds, issued and payable in pesos, had a redemp-tion value linked to the movement in the U.S. dol-lar/Mexican peso exchange rate. When the Mexicanpeso depreciated, the redemption value increased.

Classification

Bonds with payoffs linked to movements inexchange rates and owned by nonresidents are to beincluded in the gross external debt position. Theyshould be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP)unless they have an original maturity of one year orless, in which instance they are to be classified asmoney market instruments. Alternatively, dependingon the relationship between debtor and creditor,these securities could be classified as direct invest-

ment, intercompany lending (see the description ofdirect investment in Chapter 3).

Currency Pool Loans

Currency pool loans, provided by the World Bankand regional development banks, are multicurrencyobligations committed in U.S. dollar-equivalentterms whose currency composition is the same(pooled) for all borrowers. The World Bank guaran-tees that at least 90 percent of the U.S. dollar-equiva-lent value of the currency pool is maintained in fixedcurrency ratios of 1 U.S. dollar: 125 Japanese yen: 1euro. These ratios have been maintained since 1991,and prior to the introduction of the euro, the currencyratios were maintained in a fixed ratio of 1 U.S. dol-lar: 125 Japanese yen: 2 deutsche mark equivalent(consisting of deutsche mark, Netherlands guilders,and Swiss francs). The currency amount disbursed isconverted into a U.S. dollar equivalent amount, usingthe applicable exchange rate on the day of disburse-ments. The U.S. dollar equivalent amount is thendivided by the pool unit value on the day of disburse-ment to determine the pool units disbursed. The poolunits are what the borrower will have to repay. Whenpool units are to be repaid, they are converted backinto the dollar equivalent amount using the prevailingpool unit value. Thus, the pool unit value may bethought of as an exchange rate used to convert theunits into their equivalent value in U.S. dollars, and itchanges daily in accordance with movements of theexchange rates of the currencies in the pool. The poolunit value is calculated by dividing the U.S. dollarequivalent of the currencies in the pool by the totalnumber of pool units outstanding. As the U.S. dollarappreciates relative to other currencies in the pool,the pool unit value decreases.

Classification

Currency pool loans of the borrowing economy areto be included in the gross external debt position.They should be classified as loans (other investmentin the IIP).

D

Deep-Discount Bond

A bond that has small interest payments and isissued at a considerable discount to its par value. Seealso Zero-Coupon Bonds.

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Classification

Deep-discount bonds owned by nonresidents are tobe included within the gross external debt position.They should be classified as long-term, bonds andnotes (portfolio investment, debt securities in theIIP) unless they have an original maturity of oneyear or less, in which instance they are to be classi-fied as money market instruments. Alternatively,depending on the relationship between debtor andcreditor, these securities could be classified as directinvestment, intercompany lending (see the descrip-tion of direct investment in Chapter 3).

Depository Receipts

A depository receipt allows a nonresident entity tointroduce its equity or debt into another market in aform more readily acceptable to the investors inthat market. A depository bank will purchase theunderlying foreign security and then issue receipts ina currency more acceptable to the investor. Theinvestor can exchange the depository receipts forthe underlying security at any time. See also Ameri-can Depository Receipts and Bearer DepositoryReceipts.

Classification

A depository receipt is classified according to thenature of the underlying instrument backing it. Thisis because the “issuing” intermediary does not takethe underlying security onto its balance sheet butsimply acts as a facilitator. So, the debtor is theissuer of the underlying security. If owned by non-residents, these instruments, if a debt security is theunderlying instrument, are to be included in thegross external debt position. They should be classi-fied as long-term, bonds and notes (portfolio invest-ment, debt securities in the IIP) unless they have anoriginal maturity of one year or less, in whichinstance they are to be classified as money marketinstruments. Alternatively, depending on the rela-tionship between debtor and creditor, these securi-ties could be classified as direct investment,intercompany lending (see the description of directinvestment in Chapter 3). If the underlying item is anequity investment, it should be classified in thememorandum item, equity liabilities. If the nonresi-dent is in a direct investment relationship with theissuer, then the equity is classified as Direct invest-ment in reporting economy: equity capital and rein-vested earnings in the memorandum item.

Deposits in Mutual Associations

Deposits in the form of shares or similar evidence ofdeposit issued by mutual associations such as sav-ings and loans, building societies, credit unions, andthe like are classified as bank deposits. See BankDeposits.

Classification

Deposits in mutual associations owned by nonresi-dents are to be included in the gross external debtposition. They should be classified as banks, short-term, currency and deposits (other investment in theIIP).

Dual-Currency Bonds

Dual-currency bonds are a group of debt securitieswhere the interest and/or principal payments differfrom the currency in which the bond is issued. Theissue of currency-linked bonds followed the devel-opment of the currency swap market that broadenedthe range of currencies in which international bondswere issued.

Classification

Dual-currency bonds owned by nonresidents are tobe included in the gross external debt position. Theyshould be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP)unless they have an original maturity of one year orless, in which instance they are to be classified asmoney market instruments. Alternatively, dependingon the relationship between debtor and creditor,these securities could be classified as direct invest-ment, intercompany lending (see the description ofdirect investment in Chapter 3).

E

Equity

Equity securities cover all instruments and recordsacknowledging, after the claims of all creditors havebeen met, claims to the residual values of incorpo-rated enterprises.

Classification

Equity securities are included in the memorandumitem, equity liabilities. If the nonresident is in a

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direct investment relationship with the issuer, thenthe equity is classified as Direct investment inreporting economy: equity capital and reinvestedearnings in the memorandum item.

Equity-Linked Bond

An equity-linked bond comprises features of bothdebt and equity. Equity-linked bonds are debt instru-ments that contain an option to purchase (either byconversion of existing debt or by exercising the rightto purchase) an equity stake in the issuer, its parent,or another company at a fixed price. These instru-ments are usually issued when stock market pricesare rising because companies can raise funds atlower than market interest rates while investorsreceive interest payments, and potentially lock intocapital gains.

Classification

Equity-linked bonds, if owned by nonresidents, areto be included in the gross external debt position.They should be classified as long-term, bonds andnotes (portfolio investment, debt securities inthe IIP) unless they have an original maturity ofone year or less, in which instance they are to beclassified as money market instruments. Alter-natively, depending on the relationship betweendebtor and creditor, these securities could be classi-fied as direct investment, intercompany lending(see the description of direct investment in Chap-ter 3). If the bonds are converted into equity,the debt is extinguished. The equity issued isrecorded in the memorandum item, equity lia-bilities. If the nonresident is in a direct investmentrelationship with the issuer, then the equity is clas-sified as Direct investment in reporting economy:equity capital and reinvested earnings in the memo-randum item. See also Equity Warrant Bond andWarrants.

Equity-Linked Derivatives

Derivatives whose value derives from equity prices.These include:• Equity future—traded on an organized exchange,

in which counterparties commit to buy or sell aspecified amount of an individual equity or a bas-ket of equities or an equity index at an agreed con-tract price on a specified date;

• Equity option—gives the purchaser the right butnot the obligation to purchase (call) or sell (put) aspecified amount of an individual equity or a bas-ket of equities or an equity index at an agreed con-tract price on or before a specified date; and

• Equity swap—in which one party exchanges a rateof return linked to an equity investment for the rateof return on another equity investment.

Net cash settlements are usually made.

Classification

Equity-linked derivatives in which the counterpartyis a nonresident are included indistinguishably in thememorandum item, financial derivatives.

Equity Warrant Bond (Debt-with-EquityWarrants)

Equity warrant bonds are debt securities that incor-porate warrants, which give the holder the option topurchase equity in the issuer, its parent company, oranother company during a predetermined period oron one particular date at a fixed contract price. Thewarrants are detachable and may be traded sepa-rately from the debt security. The exercise of theequity warrant will normally increase the total capi-tal funds of the issuer because the debt is notreplaced by equity but remains outstanding until thedate of its redemption. The issue of equity warrantbonds reduces the funding costs for borrowersbecause the investor will generally accept a loweryield in anticipation of the future profit to be gainedfrom exercising the warrant.

Classification

Because the warrant is detachable and may betraded separately from the debt security, thetwo instruments should be separately recorded.Bonds owned by nonresidents are to be included inthe gross external debt position. They shouldbe classified as long-term, bonds and notes (port-folio investment, debt securities in the IIP) unlessthey have an original maturity of one year or less,in which instance they are to be classified as moneymarket instruments. Alternatively, depending onthe relationship between debtor and creditor,these securities could be classified as direct invest-ment, intercompany lending (see the descrip-tion of direct investment in Chapter 3). Warrants

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owned by nonresidents are to be included indis-tinguishably in the memorandum item, financialderivatives.

F

Fixed-Rate Bond

A bond whose coupon payments remain unchangedfor the life of the bond or for a certain number ofyears. See also Variable-Rate Bond.

Classification

Fixed-rate bonds owned by nonresidents are to beincluded in the gross external debt position. Theyshould be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP)unless they have an original maturity of one year orless, in which instance they are to be classified asmoney market instruments. Alternatively, dependingon the relationship between debtor and creditor,these securities could be classified as direct invest-ment, intercompany lending (see the description ofdirect investment in Chapter 3).

Foreign Bonds

A foreign bond is a security issued by a nonresidentborrower in a domestic capital market, other than itsown, usually denominated in the currency of thatmarket. Issues are placed publicly or privately. Thesebonds generally adopt the characteristics of thedomestic market of the country in which they areissued, such as in terms of registration—bearer orregistered form—settlement, and coupon paymentarrangements. Common foreign bonds are Yankeebonds (U.S. market), Samurai bonds (Japan), andBulldog bonds (U.K.).

Classification

If the owner of the foreign bond is a nonresident, andthis is most likely given that the bonds are issued inforeign markets, the bonds are to be included in thegross external debt position. They should be classi-fied as long-term, bonds and notes (portfolio invest-ment, debt securities in the IIP) unless they have anoriginal maturity of one year or less, in whichinstance they are to be classified as money marketinstruments. Alternatively, depending on the rela-

tionship between debtor and creditor, these securi-ties could be classified as direct investment, inter-company lending (see the description of directinvestment in Chapter 3).

Foreign-Currency-Linked Derivatives

Derivatives whose value is linked to foreign cur-rency exchange rates. The most common foreign-currency-linked derivatives are:• Forward-type foreign exchange rate contracts,

under which currencies are sold or purchased foran agreed exchange rate on a specified day;

• Foreign exchange swaps, whereby there is an ini-tial exchange of foreign currencies and a simulta-neous forward purchase/sale of the samecurrencies;

• Cross-currency interest rate swaps, whereby—following an initial exchange of a specifiedamount of foreign currencies—cash flows relatedto interest and principal payments are exchangedaccording to a predetermined schedule; and

• Options that give the purchaser the right but notthe obligation to purchase or sell a specifiedamount of a foreign currency at an agreed contractprice on or before a specified date.

Classification

Foreign-currency-linked derivatives in which thecounterparty is a nonresident are included indistin-guishably in the memorandum item, financial deriv-atives.

Forward-Type Derivatives

A contract in which two counterparties commit toexchange an underlying item—real or financial—ina specified quantity, on a specified date, at an agreedcontract price or, in the specific example of a swapscontract, agree to exchange cash flows, determinedby reference to the price(s) of, say, currencies orinterest rates according to predetermined rules. Inessence, two counterparties are trading risk expo-sures of equal market value.

Classification

Forward-type derivatives in which the counterpartyis a nonresident are included in the memorandumitem, financial derivatives.

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G

Gold Swaps

A gold swap involves an exchange of gold for for-eign exchange deposits with an agreement that thetransaction be reversed at an agreed future date at anagreed gold price. The gold taker (cash provider)will not usually record the gold on its balance sheet,while the gold provider (cash taker) will not usuallyremove the gold from its balance sheet. In this man-ner, the transaction is analogous to a repurchaseagreement and should be recorded as a collateralizedloan. See Appendix II; see also Repurchase Agree-ments in Part 2 of this appendix.

Classification

For the cash taker, a gold swap is classified as a loan;so borrowing under a gold swap from a nonresidentis included within the gross external debt position.The debt should be classified as a loan (other invest-ment in the IIP).

I

Index-Linked Securities

Index-linked securities are debt instruments withcoupon and/or principal payments linked to com-modity prices, interest rates, stock exchange, orother price indices. The benefits to the issuer ofindexing include a reduction in interest costs if thedeal is targeted at a particular group of investors’requirements, and/or an ability to hedge an exposedposition in a particular market. The benefit toinvestors is in the ability to gain exposure to a widerange of markets (for example, foreign exchangeor property markets) without the same degree ofrisk that may be involved in investing in the mar-kets directly. Issues linked to a consumer priceindex also provide investors with protection againstinflation.

Classification

Index-linked securities owned by nonresidents are tobe included within the gross external debt position.They should be classified as long-term, bonds andnotes (portfolio investment, debt securities in theIIP) unless they have an original maturity of oneyear or less, in which instance they are to be classi-

fied as short-term, money market instruments. Alter-natively, depending on the relationship betweendebtor and creditor, these securities could be classi-fied as direct investment, intercompany lending (seethe description of direct investment in Chapter 3).When interest payments are index linked, the pay-ments are treated as interest. If the value of the prin-cipal is index linked, the issue price should berecorded as principal, and any subsequent change invalue due to indexation should be treated as an inter-est cost, and added to the value of the underlyinginstrument.

Interest-Rate-Linked Derivatives

Derivatives whose value is linked to interest rates.The most common are:• Interest rate swaps, which involve an exchange of

cash flows related to interest payments, orreceipts, on a notional amount of principal in onecurrency over a period of time;

• Forward rate agreements, in which a cash settle-ment is made by one party to another calculated bythe difference between a market interest rate of aspecified maturity in one currency on a specificdate and an agreed interest rate, times a notionalamount of principal that is never exchanged (if themarket rate is above the agreed rate, one party willagree to make a cash settlement to the other, andvice versa); and

• Interest rate options that give the purchaser theright to buy or sell a specified notional value at aspecified interest rate—the price traded is 100 lessthe agreed interest rate, with settlement based onthe difference between the market rate and thespecified rate times the notional value.

Classification

Interest-rate-linked derivatives in which the counter-party is a nonresident are included indistinguishablyin the memorandum item, financial derivatives.

L

Land Ownership

By convention, land can only be owned by residents.So if a nonresident purchases land, then a notionalresident entity is created on which the nonresidenthas a financial claim.

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Classification

The financial claim the nonresident has on thenotional resident entity is assumed to be a directinvestment equity investment, so the equity invest-ment is classified in the memorandum item, Directinvestment in reporting economy: equity capital andreinvested earnings.

Letters of Credit

Letters of credit provide a guarantee that funds willbe made available, but no financial liability existsuntil funds are actually advanced.

Classification

Because letters of credit are not debt instruments,they are not included within the gross external debtposition.

Loans

Loans comprise those financial assets createdthrough the direct lending of funds by a creditor to adebtor through an arrangement in which the lendereither receives no security evidencing the transactionor receives a nonnegotiable document or instrument.Included are loans to finance trade, other loans andadvances (including mortgages), use of IMF credit,and loans from the IMF. In addition, finance leasesand repurchase agreements are covered under loans.Loans may be payable in the domestic or foreigncurrency(s).

Classification

Loans extended by nonresidents to residents are tobe included in the gross external debt position asloans (other investment in the IIP). Alternatively,depending on the relationship between debtor andcreditor, the debt could be classified as direct invest-ment, intercompany lending (see the description ofdirect investment in Chapter 3).

M

Medium-Term Notes (MTNs)

These are debt instruments of usually one- to five-year maturity issued in bearer form under a programagreement through one or more dealers. Once a

program is set up, issues can be made quickly totake advantage of market conditions, with issuesstructured more closely to investors’ needs than inthe public bond markets. Typically, the MTNmarket is not as liquid as the international bondmarket, so issuers may have to pay a higher interestrate.

Classification

Medium-term notes owned by nonresidents are to beincluded within the gross external debt position.They should be classified as long-term, bonds andnotes (portfolio investment, debt securities in theIIP) unless they have an original maturity of oneyear or less, in which instance they are to be classi-fied as money market instruments. Alternatively,depending on the relationship between debtor andcreditor, these securities could be classified as directinvestment, intercompany lending (see the descrip-tion of direct investment in Chapter 3).

Military Debt

Loans and other credits extended for militarypurposes.

Classification

Military debt owed to nonresidents is to be includedin the gross external debt position, allocated by thenature of the debt instrument.

Miscellaneous Accounts Payable andReceivable

See Other Accounts Payable and Receivable.

Money Market Instruments

Money market instruments are debt securities thatgenerally give the owner the unconditional rightto receive a stated, fixed sum of money on a speci-fied date. These instruments usually are traded, at adiscount, in organized markets; the discount isdependent upon the interest rate and the timeremaining to maturity. Included are such instru-ments as treasury bills, commercial and financialpaper, banker’s acceptances, negotiable certificatesof deposit (with original maturities of one year orless), and short-term notes issued under noteissuance facilities.

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Classification

Money market instruments owned by nonresidentsare to be included in the gross external debt position.They should be classified as short-term, money mar-ket instruments (portfolio investment, debt securitiesin the IIP). Alternatively, depending on the relation-ship between debtor and creditor, these securitiescould be classified as direct investment, intercom-pany lending (see the description of direct invest-ment in Chapter 3).

Mortgage-Backed Securities

A mortgage-backed security is a form of asset-backed security. See Asset-Backed Securities.

Classification

Mortgage-backed securities owned by nonresidentsare to be included in the gross external debt position.They should be classified as long-term, bonds andnotes (portfolio investment, debt securities in the IIP).

Mutual Fund Shares

Mutual funds are financial institutions through whichinvestors pool their funds to invest in a diversifiedportfolio of securities. The shares in the fund pur-chased by individual investors represent an ownershipinterest in the pool of underlying assets—that is, theinvestors have an equity stake. Because professionalfund managers make the selection of assets, mutualfunds provide individual investors with an opportunityto invest in a diversified and professionally managedportfolio of securities without the need of detailedknowledge of the individual companies issuing thestocks and bonds. Usually, fund managers must ade-quately inform investors about the risks and expensesassociated with investment in specific funds.

Classification

Because nonresidents own mutual fund shares, theshares are equity investments to be included in thememorandum item, equity liabilities.

N

Nondeliverable Forward Contracts (NDFs)

A nondeliverable forward contract is a foreign cur-rency financial derivative instrument. An NDF dif-fers from a normal foreign currency forward contract

in that there is no physical settlement of two curren-cies at maturity. Rather, based on the movement oftwo currencies, a net cash settlement will be madeby one party to the other. NDFs are commonly usedto hedge local currency risks in emerging marketswhere local currencies are not freely convertible,where capital markets are small and undeveloped,and where there are restrictions on capital move-ments. Under these conditions, an NDF marketmight develop in an offshore financial center, withcontracts settled in major foreign currencies, such asthe U.S. dollar.

Classification

NDF contracts in which the counterparty is a nonres-ident are included indistinguishably in the memoran-dum item, financial derivatives.

Nonparticipating Preferred Shares

These are a type of preferred shares in which the pay-ment of a “dividend” (usually at a fixed rate) is calcu-lated according to a predetermined formula and notdetermined by the earnings of the issuer. In otherwords, the investor does not participate in the distrib-ution of profits to equity investors (if any), nor sharein any surplus on dissolution of the issuer. See alsoPreferred Shares and Participating Preferred Shares.

Classification

Nonparticipating preferred shares are debt instru-ments, and so if owned by a nonresident are to beincluded in the gross external debt position. Theyshould be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP)unless they have an original maturity of one year orless, in which instance they are to be classified asmoney market instruments. Alternatively, dependingon the relationship between debtor and creditor,these securities could be classified as direct invest-ment, intercompany lending (see the description ofdirect investment in Chapter 3).

Nontraded Debt

Debt instruments that are not usually traded or trad-able in organized and other financial markets.

Classification

Depends on the nature of the instrument.

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Note Issuance Facilities (NIFs) / RevolvingUnderwriting Facilities (RUFs)

A note issued under an NIF/RUF is a short-terminstrument issued under a legally binding medium-term facility—a form of revolving credit. A bank, orbanks, underwrite, for a fee, the issuance of thisthree- or six-month paper and may be called upon topurchase any unsold paper at each rollover date, orto provide standby credit facilities. The basic differ-ence between an NIF and an RUF is in the under-writing guarantee: under an RUF the underwritingbanks agree to provide loans should the issue fail,but under an NIF they could either lend or purchasethe outstanding notes. First developed in the early1980s, the market for NIFs grew substantially for ashort period in the mid-1980s. It was a potentiallyprofitable market for international banks at a timewhen the syndicated credits market was depressed,following the debt crisis of the early 1980s. By theearly 1990s, euro commercial paper (ECP), and euromedium-term notes (EMTNs) had become morepopular forms of finance.

Classification

Notes issued under an NIF/RUF that are owned by anonresident are to be included in the gross externaldebt position. They should be classified as short-term, money market instruments (portfolio invest-ment, debt securities in the IIP). This is because thecontractual maturity is less than one year’s maturity.Alternatively, depending on the relationship betweendebtor and creditor, these securities could be classi-fied as direct investment, intercompany lending (seethe description of direct investment in Chapter 3).

O

Operational Leases

Operational leases are arrangements in whichmachinery or equipment is rented out for specifiedperiods of time that are shorter than the totalexpected service lives of the machinery or equip-ment. Typically under an operational lease, thelessor normally maintains the stock of equipment ingood working order, and the equipment can be hiredon demand or at short notice; the equipment may berented out for varying periods of time; and the lessoris frequently responsible for the maintenance andrepair of the equipment as part of the service which

he provides to the lessee. Under an operational lease,ownership of the equipment does not change hands;rather, the lessor is regarded as providing a service tothe lessee, on a continuous basis.

Classification

Operational leases are not financial instruments, butrather the provision of a service, the cost of whichaccrues continuously. Any payments under an opera-tional lease are either classified as prepayments forservices—creating a trade credit claim on thelessor—or postpayments for services rendered—extinguishing a trade credit liability to the lessor.

Options

An option is a contract that gives the purchaser theright but not the obligation to buy (call) or sell (put)a specified underlying item—real or financial—at anagreed contract (strike) price on or before a specifieddate from the writer of the option.

Classification

Options owned by nonresidents are to be included inthe memorandum item, financial derivatives.

Other Accounts Payable and Receivable

Other accounts payable and receivable—see alsoTrade Credit—include amounts due in respect oftaxes, dividends, purchases and sales of securities,rent, wages and salaries, and social contributions.

Classification

Other accounts payable owed to nonresidents are tobe included in the gross external debt position. Theyshould be classified as other debt liabilities (otherinvestment in the IIP). Alternatively, depending onthe relationship between debtor and creditor, thesesecurities could be classified as direct investment,intercompany lending (see the description of directinvestment in Chapter 3).

P

Participating Preferred Shares

Also known as a participating preference share.These are a type of preferred share where the

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investor has some entitlement to a share in the prof-its or a share of any surplus on dissolution of theissuer (in addition to the fixed dividend paymentreceived). See also Preferred Shares and Nonpartici-pating Preferred Shares.

Classification

Because of the claim on the residual value of theissuer, participating preference shares are classifiedas equity instruments, and so are included in thememorandum item, equity liabilities. If the nonresi-dent is in a direct investment relationship with theissuer, then the equity is classified as Direct invest-ment in reporting economy: equity capital and rein-vested earnings in the memorandum item.

Permanent Interest-Bearing Shares (PIBS)

These are deferred shares issued by mutual soci-eties, which rank beneath ordinary shares (whichare more akin to deposits than equity in mutualsocieties) and all other liabilities (including subor-dinated debt) in the event of a dissolution of thesociety. They provide “permanent” capital. In theUnited Kingdom these instruments are non-profit-participating by regulatory requirement; rather,predetermined (but not necessarily fixed) interestcosts are payable, with the amounts to be paid notlinked to the issuer’s profits; interest costs are notto be paid if this would result in the society breach-ing capital adequacy guidelines and are noncumula-tive; but more PIBS can be issued in lieu of a cashdividend.

Classification

PIBS are debt instruments because they are a formof nonparticipating preferred share (defined as suchbecause the holders of the instruments do not partic-ipate in the profits of the society). PIBS owned bynonresidents are to be included within the grossexternal debt position. They should be classified aslong-term, bonds and notes (portfolio investment,debt securities in the IIP) unless they have an origi-nal maturity of one year or less, in which instancethey are to be classified as money market instru-ments. Alternatively, depending on the relationshipbetween debtor and creditor, these securities couldbe classified as direct investment, intercompanylending (see the description of direct investment inChapter 3).

Perpetual Floating-Rate Notes

A debt security whose coupon is refixed periodicallyon a refix date by reference to an independent inter-est rate index such as three-month LIBOR. Gener-ally, these instruments are issued by financialinstitutions, particularly banks, and are perpetual soas to replicate equity and qualify as tier-two capitalunder the Basel capital adequacy requirements.Investor demand for perpetual floating-rate notes hasbeen weak in recent years.

Classification

Despite the perpetual nature of these instruments,they are debt securities because the instruments givethe holder a contractually determined moneyincome. Perpetual floating-rate notes owned bynonresidents are to be included within the grossexternal debt position. They should be classified aslong-term, bonds and notes (portfolio investment,debt securities in the IIP) unless they have an origi-nal maturity of one year or less, in which instancethey are to be classified as money market instru-ments. Alternatively, depending on the relationshipbetween debtor and creditor, these securities couldbe classified as direct investment, intercompanylending (see the description of direct investment inChapter 3).

Preferred Shares

Also known as a preference share. Preferred sharesare a class of equity capital that rank ahead of com-mon equity in respect of dividends and distributionof assets upon dissolution of the incorporated enter-prise. Investors have little control over the decisionsof the company: voting rights are normally restrictedto situations where the rights attached to preferredshares are being considered for amendment. Pre-ferred shares are registered securities. Preferredshare issues typically pay a fixed-rate dividend pay-ment that is calculated according to a predeterminedformula, but some preferred shares participate in theprofits of the issuer.

Classification

Preferred shares are classified as equity securities ifthe shares are participating and debt securities if theshares are nonparticipating. See Nonparticipatingand Participating Preferred Shares for specific clas-sification requirements.

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Promissory Note

An unconditional promise to pay a certain sum ondemand on a specified due date. Promissory notesare widely used in international trade as a securemeans of payment. They are drawn up (issued) by animporter in favor of the exporter. When the latterendorses the note, provided the importer is credit-worthy, a promissory note is traded.

Classification

Promissory notes are money market instruments thatare claims on the issuer. If owned by nonresidents,promissory notes should be included in the grossexternal debt position. They should be classified asshort-term, money market instruments (portfolioinvestment, debt securities in the IIP) unless theyhave an original maturity over one year, in whichinstance they are to be classified as bonds and notes.Alternatively, depending on the relationship betweendebtor and creditor, these securities could be classi-fied as direct investment, intercompany lending (seethe description of direct investment in Chapter 3).

R

Reverse Security Transactions

See Appendix II.

S

Stripped Securities

Stripped securities are securities that have beentransformed from a principal amount with periodicinterest coupons into a series of zero-coupon bonds,with the range of maturities matching the couponpayment dates and the redemption date of the princi-pal amount. Strips can be created in two ways.Either the owner of the original security can ask thesettlement or clearing house in which the security isregistered to “create” strips from the original secu-rity, in which case the strips replace the originalsecurity and remain the direct obligation of theissuer of the security; or the owner of the originalsecurity can issue strips in its own name, “backed”by the original security, in which case the strips rep-resent new liabilities and are not the direct obligationof the issuer of the original security. Usually, short-term strips are bought by money managers as gov-

ernment bill or note substitutes; intermediate matu-rity strips will be purchased by investors who believethat the yield curve might become more positive.Whereas demand is strongest for the longer maturi-ties because these instruments have longer durationthan the original bonds and are leveraged invest-ments, a relatively small up-front payment gives theinvestor exposure to a larger nominal amount.

Classification

Stripped securities owned by a nonresident are to beincluded in the gross external debt position. Depend-ing on their maturity, a stripped security is to beclassified as either short-term, money market instru-ments (original maturity of one year or less) or long-term, bonds and notes (original maturity of over oneyear) (portfolio investment, debt securities in theIIP). Alternatively, depending on the relationshipbetween debtor and creditor, these securities couldbe classified as direct investment, intercompanylending (see the description of direct investment inChapter 3). The residence of the issuer depends onwho has issued the strips. If the owner of the originalsecurity issues the stripped bonds, then the residenceof the issuer is that of the entity issuing the strips;the underlying securities remain extant. If the stripsremain the direct obligation of the original issuer,then the issuer is the original issuer, and the strips“replace” the original securities that have beenstripped.

Structured Bonds

Structured bonds have characteristics that aredesigned to attract a certain type of investor and/ortake advantage of particular market circumstances.However, structuring securities to appeal to a partic-ular type of investor risks the possibility of a loss ofliquidity if the market moves in such a way as tomake the structured features of the issue no longerattractive. Typically the structured features areachieved through the use of derivatives—forinstance, a credit-linked note is a bond with anembedded credit derivative.

Classification

Structured bonds are debt instruments, and if ownedby a nonresident are to be included in the grossexternal debt position. They should be classified aslong-term, bonds and notes (portfolio investment,

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debt securities in the IIP) unless they have an origi-nal maturity of one year or less, in which instancethey are to be classified as money market instru-ments. Alternatively, depending on the relationshipbetween debtor and creditor, these securities couldbe classified as direct investment, intercompanylending (see the description of direct investment inChapter 3). Any embedded derivative is regarded asan integral part of the bond and not separately valuedand identified.

Structured Floating-Rate Notes

The structured floating-rate note is a variation of astandard variable-rate bond (that is, a long-dateddebt security whose coupon payment is reset period-ically by reference to an independent interest rateindex such as six-month LIBOR). The structuredissue includes a derivative that allows the couponcalculation to be tailored to meet investors’ interestrate expectations. For instance, there may be aninterest rate collar or band—the interest rate cannotincrease above an upper specified rate or fall below alower specified rate. The issue of structured floating-rate notes has grown as borrowers have used finan-cial derivatives to tailor financing products toinvestor demands while meeting their own fundingneeds.

Classification

Structured floating-rate notes are debt instruments,and if owned by a nonresident are to be included inthe gross external debt position. They should beclassified as long-term, bonds and notes (portfolioinvestment, debt securities in the IIP) unless theyhave an original maturity of one year or less, inwhich instance they are to be classified as moneymarket instruments. Alternatively, depending on therelationship between debtor and creditor, these secu-rities could be classified as direct investment, inter-company lending (see the description of directinvestment in Chapter 3). Any embedded derivativeis regarded as an integral part of the note and notseparately valued and identified.

Swaps

A forward-type financial derivative contract inwhich two counterparties agree to exchange cashflows determined with reference to prices of, say,currencies or interest rates, according to predeter-

mined rules. At inception, this instrument typicallyhas zero market value, but as market prices changethe swap acquires value.

Classification

Swaps in which the counterparty is a nonresidentare included in the memorandum item, financialderivatives.

T

Total Return Swap

A credit derivative that swaps the total return on afinancial instrument, cash flows and capital gainsand losses, for a guaranteed interest rate, such as aninterbank rate, plus a margin.

Classification

Total return swaps in which the counterparty is anonresident are included in the memorandum item,financial derivatives.

Trade Credit

Trade credits consist of claims and liabilities arisingfrom the direct extension of credit by suppliers fortransactions in goods and services, and advance pay-ments by buyers for goods and services and for workin progress (or to be undertaken). The direct exten-sion of trade credit by buyers arises when theyprepay for goods and services; the debt is extin-guished when the supplier provides the goods and/orservices.

Classification

Trade credit owed to nonresidents is to be included inthe gross external debt position. Such credit shouldbe classified as trade credit (other investment in theIIP). Alternatively, depending on the relationshipbetween debtor and creditor, the credit could be clas-sified as direct investment, intercompany lending (seethe description of direct investment in Chapter 3).1993 SNA regards trade credit as a form of accountspayable/receivable (1993 SNA, paragraph 11.100).

Treasury Bills

A common form of sovereign short-term debt; manygovernments of the world issue treasury bills. Typi-

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cally issued through the central bank with maturitiesranging from four weeks to two years, they are typi-cally issued at a discount to face value and areredeemed at par.

Classification

Treasury bills are debt instruments, and so if ownedby a nonresident are to be included in the grossexternal debt position. These bills should be classi-fied as short-term, money market instruments (port-folio investment, debt securities in the IIP) unlessthey have an original maturity of more than one year,in which instance they are to be classified as longterm, bonds and notes.

U

Use of IMF Credit and Loans

These comprise members’ drawings on the IMFother than those drawn against the country’s reservetranche position. Use of IMF credit and loansincludes purchases and drawings under Stand-By,Extended, Structural Adjustment, Enhanced Struc-tural Adjustment, and Systemic TransformationFacility Arrangements, together with Trust Fundloans.

Classification

Use of IMF credit and loans is to be included in thegross external debt position as monetary authorities,loans (other investment in the IIP). Because of theparticular accounting procedures of the IMF, the useof IMF credit might be considered to have some ofthe characteristics of a swap of currencies. However,since the IMF has lent in SDR terms, with paymentsin SDR terms, at an interest rate that is SDR-related,the recommended classification reflects the eco-nomic nature of the transaction—a loan.

V

Variable-Rate Bond

A bond whose interest payments are linked to a ref-erence index (for example, LIBOR), or the price of aspecific commodity, or the price of a specific finan-cial instrument that normally changes over time in acontinuous manner in response to market pressures.

Classification

Variable-rate bonds owned by nonresidents are to beincluded in the gross external debt position. Theyshould be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP)unless they have an original maturity of one year orless, in which instance they are to be classified asmoney market instruments. Alternatively, dependingon the relationship between debtor and creditor,these securities could be classified as direct invest-ment, intercompany lending (see the description ofdirect investment in Chapter 3).

Variable-Rate Notes (VRNs)

These securities adopted the standard characteristicsof a variable-rate bond. However, whereas a standardcharacteristic of a variable-rate bond is that it carriesa fixed spread over a referral index, the spread overLIBOR on a VRN varies over time depending on thechange in the perceived credit risk of the issuer. Thespread is reset at each rollover date—normally everythree months—by means of negotiation between theissuer and arranging house. VRNs are usually issuedwith no maturity date (perpetual VRNs) but fixedfive-year and longer-dated issues are in existence.VRNs generally have a put option for the existingholders of notes to sell the issue back to the leadmanager of the issuing syndicate, at par, at any inter-est payment date.

Classification

VRNs owned by nonresidents are to be included inthe gross external debt position. They should be clas-sified as long-term, bonds and notes (portfolio invest-ment, debt securities in the IIP) unless they have anoriginal maturity of one year or less, in whichinstance they are to be classified as money marketinstruments. Alternatively, depending on the relation-ship between debtor and creditor, these securitiescould be classified as direct investment, intercom-pany lending (see the description of direct investmentin Chapter 3). The put option, embedded in theinstrument, is not valued and classified separately.

W

Warrants

Warrants are a form of financial derivative giving theowner the right but not the obligation to purchase or

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sell from the issuer of the warrant a fixed amount ofan underlying asset, such as equities and bonds, at anagreed contract price for a specified period of timeor on a specified date. Although similar to tradedoptions, a distinguishing factor is that the exercise ofthe warrants can create new securities, thus dilutingthe capital of existing bond or shareholders, whereastraded options typically grant rights over assets thatare already available. Warrants can be issued in theirown right or with equity or bonds to make the under-lying issue more attractive. They can be quoted andtraded separately in the secondary market.

Classification

Warrants owned by nonresidents are to be includedin the memorandum item, financial derivatives.

Z

Zero-Coupon Bonds

A single-payment security that does not involveinterest payments during the life of the bond. Thebond is sold at a discount from par value, and the fullreturn is paid at maturity. The difference between thediscounted issue price and the face or redemptionvalue reflects the market rate of interest at the timeof issue and time to maturity. The longer the matu-rity of the bond and the higher the interest rate, thegreater the discount against the face or redemptionvalue. Zero-coupon, and deep-discount bonds, havefour particular advantages for investors:• There may be some tax advantage in receiving a

capital gain rather than an income payment;• There is no or little (deep-discount bond) reinvest-

ment risk (the possibility that when coupon pay-ments fall due, and need to be reinvested, interestrates will be lower);

• The bond has a longer “duration” than a bond ofcomparable maturity that pays fixed- or variable-rate interest, so making the zero-coupon bond’sprice more sensitive to interest rate changes; and

• A zero-coupon bond is a leveraged investment inthat a relatively small initial outlay gives exposureto a larger nominal amount.

See also Deep-Discount Bond.

Classification

Zero-coupon bonds owned by nonresidents are to beincluded in the gross external debt position. They

should be classified as long-term, bonds and notes(portfolio investment, debt securities in the IIP)unless they have an original maturity of one year orless, in which instance they are to be classified asmoney market instruments. Alternatively, dependingon the relationship between debtor and creditor,these securities could be classified as direct invest-ment, intercompany lending (see the description ofdirect investment in Chapter 3).

Part 2. Classification of SpecificTransactions

This section discusses the classification treatmentwithin the gross external debt position of specifictransactions.

Arrears: When Should They Be Recorded?

Arrears should be recorded from the day after arequired payment has not been made. It is recognizedthat, in some instances, arrears arise for operationalreasons rather than a reluctance or inability to pay.Nonetheless, in principle such arrears when outstand-ing at the reference date should be recorded as arrears.

Collateralization of External Debt

To provide additional assurance to the creditor, thedebtor may set aside either financial assets or futurestreams of income as collateral for the debt incurred.In other words, payments on the debt might be“backed” by future export earnings, such as receiptsfrom petroleum sales, or the creditor may have aclaim on certain financial assets held with third par-ties if the debtor defaults. Alternatively, the debtormight invest funds in a zero-coupon instrument thatat maturity will equal the value of the principal debtincurred, which is then due for repayment. In allcases, external debt should be recorded gross—thatis, separately from the collateral. For instance, wherethe debtor has invested funds in a zero-coupon bond,both the external debt and the zero-coupon bond arerecorded on a gross basis, the zero-coupon bondbeing an asset of the debtor. Also, when debt is con-tractually to be serviced by an income source of thedebtor (for example, future export earnings), thedebtor continues to record the receipt of income andthe payment of principal and/or interest even if theincome is passed directly from “source” (for exam-ple, the purchaser of the exports) to the account of

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the creditor, without directly involving the debtor.There may well be analytical interest in informationon the value of external debt that has been collateral-ized, and in the type of financial asset or incomestream used to back the external debt.

Consignment Trade

No debt is created for goods on consignment—thatis, goods intended for sale but not actually sold at thetime of crossing a frontier—because ownership ofthe goods has not changed hands.

Defeasement

Defeasance is a technique by which a debtor unitremoves liabilities from its balance sheet by pairingthem with financial assets, the income and value ofwhich are sufficient to ensure that all debt servicepayments are met. Defeasance may be carried out byplacing the paired assets and liabilities in a separateaccount within the institutional unit concerned or bytransferring them to another unit. The Guide doesnot recognize defeasance as affecting the outstand-ing debt of the debtor as long as there has been nochange in the legal obligations of the debtor. In otherwords, provided the payment obligations remain dejure with the original debtor, ownership of the liabil-ities remains unchanged, and should be reported asexternal debt of the original debtor.

Financial Leases: Treatment of Residual Values

As explained in Chapter 3, under a financial lease,ownership of the underlying item is considered tohave changed hands because the risks and rewards ofownership have, de facto, been transferred from thelegal owner to the user; this de facto change of own-ership is financed by a financial claim, which is theasset of the lessor and a liability of the lessee. How-ever, even though the rentals may enable the lessorover the period of the contract to recover most of thecosts of goods and the carrying charges, there maybe a residual amount. The lessee may have an optionto pay the residual value to gain legal ownership ofthe underlying item. How should the residualamount be recorded?

The residual amount is part of the debt obligationthat arises when the goods are assumed to havechanged ownership. In other words, under statisticalconvention, the debt at the inception of the lease isdefined as the full value of the good, inclusive of the

residual amount. This debt obligation is recorded asa loan. The loan liability arising from the residualvalue is extinguished either when the goods arereturned or when a payment is made and legal own-ership changes hands. The IMF’s Balance of Pay-ments Textbook (IMF, 1996, page 126) provides anexample of the circumstance in which there is a finalresidual payment.

This issue also raises the question of whether thereis a point at which the residual value is such a largepercentage of the total value of the goods that thelease should be regarded as operational and notfinancial. There is no firm percentage; rather, thesearrangements are determined more by their nature.When a lease is a financial arrangement, it is usu-ally evident from the roles and obligations of thetransactors—for example, the lessee is responsiblefor repairs and maintenance, and the lessor is afinancial institution, etc.

Fundamental to the assumption of a change of own-ership is the idea that, de facto, the lessee assumesthe risks and rewards of ownership from the legalowner. But if there is option rather than agreement topurchase the residual value, or if it is agreed that thelessee will pay a market price for the residualamount, the greater the percentage size of the resid-ual amount at inception, the more diminished theextent to which the de facto risks and rewards ofownership can be said to have changed hands.

Guaranteed External Debt

The provision by one institutional unit of a guaran-tee to make future debt-service payments to a non-resident creditor if certain conditions are met, suchas a default by the debtor, does not negate the claimthe creditor has on the debtor. Thus, the debtor onwhom the nonresident creditor has a claim, and notthe guarantor, should record an external debt liabil-ity, unless and until the guarantor assumes the exter-nal debt. Chapter 8 provides guidance on theclassification of debt assumption.

Islamic Banking2

Activities of Islamic financial institutions differfrom those of standard commercial depository cor-

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2Islamic banking is described in detail in Appendix 2 of theIMF’s Monetary and Financial Statistics Manual (IMF, 2000d).


porations in that predetermined interest on financialtransactions is prohibited. As is evident from the def-inition of external debt in Chapter 2, the nonpaymentof interest on liabilities does not in itself precludeinstruments from being classified as external debt.The classification of Islamic banking instruments asexternal debt, or not, can be determined by the fol-lowing general guidance.

Islamic instruments—deposits include conventionaland transferable deposits, such as Amanah and Qard-hasan deposits—as well as various investment par-ticipation certificates that are not investments in thepermanent capital of a financial institution and donot have the characteristics of tradable securities.

Islamic instruments—debt securities consist of vari-ous investment participation certificates that havethe characteristics of tradable securities and are notpermanent capital of an institutional unit. Includedin this category are the most tradable investmentcertificates recorded as liabilities of a financialcorporation.

Islamic instruments—loans cover arrangements inwhich a financial institution makes prepayments forclients, finances ventures or trade, or supplies work-ing capital to clients. The arrangements may includeshort-term or other partnerships in which a financialinstitution is not making permanent, equity-typeinvestments.

Nonlife Insurance

For nonlife insurance the following transactionsresult in external debt:• Any prepayments of premiums by nonresidents

are classified as external debt of the insurancecompany, under other debt liabilities.

• Reserves that are held against outstanding claimsof nonresidents—that is, claims that have arisenbecause an event has occurred that results in avalid claim—are also external debt of the insur-ance company. Again, these reserves are includedin other debt liabilities.

Nonresident Deposits

Because of exchange control or other restrictions,nonresident deposits in domestic banks may not betransferable out of the economy. Such restrictionsmay be introduced after the deposits have been

made or may have been established when theaccounts were opened. All such nonresident depositclaims on resident banks should be classified asexternal debt. Nonetheless, if the amounts are sig-nificant and are of analytical interest in their ownright, it is recommended that additional informationbe provided.

On-Lending of Borrowed Funds

An institutional unit within an economy might bor-row funds from a nonresident(s) and then on-lendthe funds to a second institutional unit within theeconomy. In such instances, the first institutionalunit—that is, the institutional unit that borrowedfrom the nonresident(s)—should record an externaldebt liability, with any subsequent on-lending classi-fied as a domestic claim/liability. As set out in Chap-ter 2, the decisive consideration is whether thecreditor has a claim on the debtor, and in this exam-ple the nonresident creditor has a claim on the firstinstitutional unit.

If an institutional unit within an economy borrowedfrom a nonresident(s) and on-lent the funds to a non-resident, the unit should record both external debtand an external claim. The nonresident borrowerwould also record an external debt liability in thateconomy’s measure of external debt.

Part-Payments for Capital Goods

For capital goods with long delivery periods, such asships, the purchaser may make part-payments to thebuilder or exporter while the good is being pro-duced. These part-payments should be recorded astrade credit debt of the exporter. The debt is extin-guished when the purchaser takes delivery of thegood.

Penalties Arising from Commercial Contracts

Under the terms of a commercial contract, one party(resident) may be required to compensate anotherparty (nonresident) (that is, pay a penalty) in theevent of the first party failing to meet its obligations,or some of its obligations, under the contract. Oncethe penalty is owed and until it is paid to the nonres-ident, it is external debt, and recorded under otherdebt liabilities. The debt should be recorded from thetime when the resident becomes liable under thecontract for the penalty.

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Prepayments of Goods and Services

When an importer makes a prepayment to anexporter for goods and services, the exporter has aliability to the importer that remains outstanding untilownership of the goods changes hands or the serviceis provided. Similarly, when an importer makes apostpayment some time after he acquires goods orservices, the importer has a liability to the exporterthat remains outstanding until the postpayment ismade. These liabilities should be recorded as debt lia-bilities because future payments are required; in thecase of the prepayment, the principal amount out-standing is repaid in goods or in a service provided,whereas in the case of the postpayment, it is likelythat a financial payment will be made, although in theinstance of barter, goods or services may be providedto extinguish the debt. Unless the prepayment is formore than one year hence, these debt liabilitiesshould be recorded as short term, trade credit. Also,unless the agreed date for payment is past, neither theprepayment nor postpayment of goods and servicesshould be recorded as arrears.

Processing of Goods

In BPM5, when goods are exported across a borderfor processing with the intention that the processedgoods are returned to the exporting economy, agoods transaction should be recorded in the balanceof payments—an import of the processing economyfrom the original economy. In such circumstances, acorresponding financial liability is established andrecorded as external debt under trade credit. Whenthe processed good is returned, the financial liabilityis extinguished. If the amounts are significant, it isrecommended that such trade credit be separatelyidentified (as is recommended in the trade accountof the balance of payments).

Project Loans: Disbursements

Disbursements of project loans can take the form of• Advances to the borrowing entity—disbursements

are to be recorded when the lender advances fundsto the borrower;

• Direct payment by the lender to suppliers of goodsand services—disbursements are to be recordedwhen the lender pays the supplier; and

• On a reimbursement basis after the borrower hasalready paid the suppliers—disbursements are tobe recorded when the lender makes reimburse-ments to the borrower.

Public Investment Projects

Public investment projects involve the constructionand operation by private corporations of assets of akind that are usually the responsibility of the generalgovernment sector, or public corporations. Thesecommonly include, for example, roads, bridges,water supply and sewerage treatment works, hospi-tals, prison facilities, electricity generation and dis-tribution facilities, and pipelines. In many suchinstances, such transactions are likely to be classi-fied as resident to resident, particularly if the privatecorporation creates a separate unit to constructand/or operate the asset (although in such instancesthat unit may incur external debt liabilities to itsnonresident parent, which need to be recorded). Butif the private sector corporation is a nonresident, theclassification of the transactions as external debtdepends on the nature of the arrangement:• Where an asset is constructed by a corporation and

transferred to government on completion, any pre-payments by the government are claims on a non-resident enterprise—that is, external debt of theprivate nonresident corporation. If the governmentonly pays on completion and needs to borrowabroad to finance this purchase, then the govern-ment will incur external debt when it borrows.

• Where there are lease arrangements between thegovernment and corporation, these are classifiedin the normal way as operating or finance leases,and hence external debt or not, depending onwhether the government or corporation gains mostof the risks and benefits of ownership as a result ofthe contracts entered into. For instance, if the pri-vate corporation continues to own the asset butwill transfer ownership to the government at alater date, and in the meantime the governmentmakes payments both to cover the costs of operat-ing the asset and to meet the financing costs, thena finance lease, and hence external debt, arises forthe government and should be recorded as such.

As with all finance leases, at the time of effectivechange of ownership, the market value of the good isrecorded and represents the external debt of the gov-ernment. The payments to be made need to be sepa-rated into operating and financing costs. If a marketvalue is available, the total amount paid in financingcosts over the life of the lease in relation to that pricewill determine the implicit rate of interest on theloan. Otherwise, the financing costs discounted by arepresentative interest rate of the government—thepresent value of the finance payments—could repre-

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sent the market value of the asset in the absence ofother information, and generate data on the futureinterest and principal payments—Appendix toChapter 2, examples 1 and 2, provides calculationsthat illustrate the principles involved.

Reinsurance

Positions arising from reinsurance are treated in thesame way as those arising from insurance.

For reinsurance relating to life insurance, any techni-cal reserves held by insurance companies that areassets of nonresident policyholders are external debtof the insurance company. As with claims of house-holds in life insurance companies, any such externaldebt should be included under other debt liabilitiesin the gross external debt position.

For nonlife insurance, prepayment of premiums bynonresidents, and reserves held against claims ofnonresidents that have arisen, are also external debt.In both instances, any such external debt is includedunder other debt liabilities (see also Nonlife Insur-ance, above).

Repurchase Agreements: Delay in Returningthe Security

If the security taker fails to return the security to thesecurity provider, then the recording treatmentdepends on whether the failure is simply a delay or

whether there is a default. If the failure is due to adelay (for example, the result of another party in thechain of repo securities being unable to access thespecific security at that particular date), it has noimpact on the gross external debt position, althoughin line with common market practice the securityprovider may retain the funds without paying anyinterest. If there is a default, usually under the termsof the reverse agreement the security provider’s loanliability to the security taker is extinguished—thesecurity taker no longer has a claim on the securityprovider. If the security provider defaults on return-ing the cash, then the security provider’s securityholdings fall, and those of the security takerincrease, and the loan is extinguished. In eitherevent, because the security provided is likely to be ofgreater value than the cash provided, residual claimsmay still continue to exist.

The Value of Debt After Consolidation IsGreater Than the Value of the ConsolidatedDebts Combined

If the terms of a loan are changed, a new contract iscreated. Thus, if two or more old debts are consoli-dated into one debt, the new debt replaces the two ormore old debts and is classified by type of instru-ment (loan, security, etc.). If the total value of thenew debt is greater than the old debts combined—forexample, because of extra charges arising fromrescheduling—the gross external debt positionincreases.

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1. A reverse securities transaction is defined in theGuide to include all arrangements whereby oneparty legally acquires securities and agrees, under alegal agreement at inception, to return the same orequivalent securities on or by an agreed date to thesame party from whom the securities were acquiredinitially. These arrangements are known as repur-chase agreements (repos), securities lending, andsell-/buybacks.1 Where cash is involved, the eco-nomic nature of the agreement is similar to that of acollateralized loan in that the purchaser of the secu-rity is providing funds collateralized by the securi-ties to the seller for the period of the agreement andis receiving a return from these funds through theagreed fixed price at which the securities are resoldwhen the agreement is reversed.

2. As outlined in Chapter 3, securities that are pro-vided under a reverse securities transaction arereported as remaining on the balance sheet of thesecurity provider. If the security taker sells outrightthese securities so acquired, the security taker reportsa negative (or “short”) position in the security.

3. This appendix provides some background infor-mation on reverse security transactions and someexamples of how these positions should be recordedin the gross external debt position.

What Are These Instruments?

Repurchase Agreements (Repos)

4. Under a repo, securities are provided for cash witha commitment by the seller (security provider) to

repurchase the same or similar securities for cash at afixed price on a specified future date. The securitytaker views the transaction as a reverse repo. Thesecurity taker earns interest on the cash advancedthrough the difference between the selling and buyingrates for the securities; interest is related to the currentinterbank rate and not that of the security being“repoed.”2 Full, unfettered ownership passes to thesecurity taker, who can on-sell the security, but themarket risk—the benefits (and risks) of ownership(such as the right to holding gains—and losses)—remains with the security provider, who also receivesthe property/investment income attached to the secu-rity, albeit from the security taker rather than the secu-rity issuer. Originally, it was intended that the securitytaker’s right to on-sell would be invoked only in theevent of a default by the security provider, but as themarket has developed, the right to on-sell at the secu-rity taker’s option has become commonplace.

5. Repos are actively used in international financialmarkets. They often have a very short overnightmaturity, but are also for longer maturities (some-times up to several weeks), or have an “open” matu-rity (that is, the parties agree daily to renew orterminate the agreement). Several different types ofinstitutions are involved. Most commonly, financialinstitutions transact with other financial institutions,both domestic and nonresident, and central bankswith domestic financial institutions and other centralbanks. However, nonfinancial enterprises and gov-ernments may also use repos.

6. Repos are undertaken for a variety of reasons:• To finance security purchases—that is, the secu-

rity provider acquires a security outright and thensells it under a repo to help finance the position;

Appendix II. Reverse Security Transactions

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1Sell-/buybacks are the same as repos in economic effect, but areless sophisticated operationally. If the seller acquires an optionrather than an obligation to buy back the security, the arrange-ment is sometimes called a spurious repurchase agreement. Sucha transaction is not considered to be a reverse security transactionin the Guide.

2In the event that a coupon payment is made during the life of therepo, this is taken into account when determining the funds to berepaid. However, market participants endeavor to avoid such a sit-uation if possible.

Appendix II • Reverse Security Transactions

• To increase liquidity by raising funds while retain-ing exposure to market price movements in thesecurity—that is, the security provider may want alonger-term position in the security but may alsorequire cash in the short term;

• To acquire securities in order to cover a negative(or “short”) position—that is, the security takertakes a negative position in the security, thus bene-fiting from market price declines;

• To take leverage positions in securities through aprogram of buying securities, repoing them out,purchasing more securities with the cash acquiredand so on, with only the requirement for marginslimiting this activity—that is, the security providercreates a large positive exposure to movements inthe price of the securities without having to fullyfund this exposure with own funds;

• Central banks use repos as an operational tool toease or drain liquidity in the domestic financialmarkets—in many countries, the repo rate (the ratepaid by the borrower in a repo transaction) is thebenchmark rate for central bank market lending.

7. Chains of repos and reverse repos are commonpractice in financial markets as highly creditworthymarket players raise funds at lower rates than theyare able to on-lend. In this manner, the repo marketis part of broader financial intermediation activity.3

The development of repo markets can increase theliquidity of a money market while, at the sametime, deepening the market for the underlyingsecurities used (frequently government securities,but not necessarily), leading to finer borrowingrates both for money market participants andgovernments.

8. Usually, the security provider in a repo is the ini-tiator of the transaction, which tends to place thesecurity taker in a slightly stronger negotiating posi-tion. These are called “cash-driven” repos. In thesecircumstances, the security provider is not requiredto provide a specific security—a list of acceptablesecurities is generally available. Frequently, substi-tution of the security is permitted during the life ofthe repo—that is, the security provider may wish toaccess the security repoed and so usually is permit-

ted to do so by substituting it for another of equalquality (generally, one on the list of acceptablesecurities). The right to substitute securities willusually affect the rate of interest charged on therepo.

9. In certain circumstances, one party may haveneed for a specific type of security. These transac-tions are known as “securities-driven” repos. Theyresult when a particular security goes “special”—that is, is in very high demand and there is insuf-ficient supply to meet commitments. In thesecircumstances, cash is provided as collateral(noncash collateral is discussed under SecuritiesLending, below) and the security provider is in astronger bargaining position. In essence, whena security-driven transaction takes place, thesecurity provider is prepared to accept cash in returnfor the security “lent,” provided that the providercan be compensated for the risk of lending byobtaining a sufficient spread between the interest tobe paid on the cash received and what can be earnedin the money market. In extreme cases, when thesecurity may be unavailable from any other source,the interest rate on the cash received may fall tozero.

10. Whether a transaction is cash-driven or securi-ties-driven will affect which party pays margin. Mar-gin payments provide one party with collateral ofgreater market value than the instrument being pro-vided—the term “haircut” is sometimes used todescribe this difference. Margin payments may bemade at the outset—known as initial margins—andduring the life of a repo—known as variation mar-gin.4 As the market value of the collateral falls, sovariation margin is paid, restoring the margin to itsoriginal market value. If the transaction is cash-driven, the security provider will provide the margin;if the transaction is securities-driven, the securitytaker will provide the margin. Margin may be cashor securities.

11. Market and credit risk affect the amount of mar-gin provided. The market risk is that of the underly-ing security—the more variable the market price ofthe security, the greater the margin; the credit risk isthat of the two counterparties to the repo to eachother—the greater the perceived credit risk of the

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3Repo market players may have matched or unmatched books: ina matched book, maturities of all repos out are the same as thosefor repos in; in an unmatched book, the maturities differ, in whichcase the market player is speculating on movements in the yieldcurve. 4Sale-/buybacks do not have margin payments.


margin provider, the higher the margin. In bothinstances, the higher margin protects the margintaker against the higher probability of adverse devel-opments. Because each party at the inception of arepo is equally exposed to risk, in many developedfinancial markets, initial margin may not be requiredif the credit standing is approximately equal (mone-tary authorities usually ask for initial margin andrarely, if ever, pay initial margin), but variation mar-gin is usually provided when the market price of thesecurity falls. On the other hand, when the value ofthe security rises, the security taker may or may notreturn part of the security’s value as a “reverse varia-tion margin,” depending on the market’s practices inany given country. In less developed capital markets,and depending on the depth and price volatility ofthe market of the security underlying the repo, initialmargins of substantially more (possibly up to 25 per-cent) than the value of the cash provided may berequired.

12. The legal and market arrangements for repos,including the payments of margin (whether initialor variation), the ability to substitute securities,and the retention of market risk by the securityprovider, support the view that repos are classifiedas loans, with the security remaining on the balancesheet of the security provider. This is certainly theway repos are viewed by market participants. Onthe other hand, given the change of ownership ofthe security, some argue that a security transac-tion should be recorded—the security provider nolonger has a legal claim on the security issuer.In Chapter 4 a memorandum table to the grossexternal debt position is provided that can be usedto present data on resident-issued debt securitiesthat residents (1) provided to and (2) acquired fromnonresidents under outstanding reverse transactions,including repo agreements. This table helps intracking the change of ownership of these debtsecurities between residents and nonresidents and,more generally, the positions acquired under reversetransactions.

Securities Lending

13. Under a securities lending agreement, securi-ties are provided under a legal agreement thatrequires the security taker to return the same or sim-ilar securities on or by an agreed date to the sameparty from whom the securities were acquired ini-tially. No cash is provided by the security taker to

the security provider in return for the acquisitionof the securities, although a fee may be paid bythe security taker and collateral provided (as in theform of other securities). If cash collateral isprovided, the transaction has the same economicimpact as a repo.

14. As with repos, full, unfettered ownership passesto the security taker, who can on-sell the security,but the market risk—the benefits (and risks) ofownership (such as the right to holding gains—andlosses)—remains with the original owner of thesecurity, who also receives the property/investmentincome attached to the security, albeit from thesecurity taker rather than the security issuer.Because securities lending is a securities-drivenactivity, so the security taker initiates the tran-saction, which means that the bargaining advantagelies with the “lender” of the security. The level ofthe fee charged depends on the availability ofthe security. The payment may be made at inceptionor at the closeout of the contract. In most cases,the original security owner considers the arrange-ments to be temporary and does not remove thesecurities or include the collateral on its balancesheet, since the owner retains the rights to any divi-dends or interest while the securities are on loan,albeit from the security taker rather than the secu-rity issuer.5

15. Security loans are actively used in financialmarkets. In many cases, the transfer of securitiesbetween holders is conducted by security deposito-ries. The security owner will provide the depositorywith the general right to on-lend the securities sub-ject to certain legal safeguards. As a consequence,frequently the owner of the security will be unawarethat the security it owns has been sold under a secu-rities loan agreement.

16. The primary purposes of securities lending are:• For the security taker, the security is acquired in

order to meet a commitment to sell the security—that is, to cover a negative (or “short”) position.

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5In instances where equities are loaned, the period of the loan usu-ally avoids coinciding with a shareholders’ meeting, or any otherinstance where voting rights are required to be exercised (such asfor a takeover bid). However, it is not always possible to knowwhen these situations will arise, and the arrangements usually per-mit the return of the equities to the original owner in suchcircumstances.

Appendix II • Reverse Security Transactions

The security taker can take leverage positions byselling securities it does not own and then cover-ing the position with securities acquired undersecurities loans.

• For the security provider, the fee paid by the secu-rity taker generates income—the owner has along-term position in the security, but through asecurities loan earns additional income.

• The depository can earn extra fee income, whichmight be partially passed on to the security ownerthrough lower custodial fees. The depository ismore likely to be able to manage the collateralprovided by the security taker than the securityowner, who, in return for allowing securities to belent, may pay lower custodial fees and not havethe responsibility of managing the collateralprovided.

17. Like repos, chains of securities lending can beestablished whereby brokers successively on-lendsecurities to brokers, dealers, or other parties. Thelending chains are reversed when the securities arereturned. Securities lending involves securities thatmay be issued by residents or nonresidents, by gov-ernments or by corporations, and can be either equi-ties or debt instruments. Securities lending increasesliquidity in the securities market as well as thetimeliness of some trade settlements—especiallyfor securities that trade infrequently or in smallvolume.

18. The securities taker will usually provide collat-eral in the form of other securities of equal or greatervalue to the securities “lent,” providing initial mar-gin, although in some instances no collateral is pro-vided. If cash collateral is provided, the transactionhas the same economic impact as a repo (discussedabove). If the market value of securities placed ascollateral falls relative to the value of the securities“loaned,” the securities taker is usually required toplace variation margin, to restore the relative posi-tion. If the value of the securities placed as collateralincreases, the securities provider may or may not berequired to return part of the collateral, depending oncountry practice.

19. Because of the requirement for the securities tobe returned, the payments of margin, the retentionby the original security owner of the market risks of

the securities, and the right to receive incomepayments on the security, securities lent under secu-rity loans remain on the balance sheet of the origi-nal owner. If a security taker sells the securityacquired under a security loan, a negative (or“short”) position is recorded in the security, reflect-ing the obligation to return the security to the secu-rity provider. As noted above, Chapter 4 provides amemorandum table to the gross external debt posi-tion that can be used to present data on resident-issued debt securities that residents (1) provided toand (2) acquired from nonresidents under outstand-ing reverse transactions, including security lendingagreements.

Recording Examples

20. To help compilers, some examples are set out inTable A2.1 of how different types of reverse secu-rity transactions should be recorded in the grossexternal debt position and in the memorandumtable, when debt securities are involved.6 Theseexamples show the change in the position when res-ident-issued debt securities are acquired by a non-resident from a resident, or vice versa, under areverse security transaction. In all these examples, itis assumed that debt securities involved in the trans-actions are valued at 100, and any cash provided isvalued at 95. Each example involves a transaction ina debt security issued by a resident of A. Eachexample specifies an initial transaction, followed bydifferent subsequent transactions. For each subse-quent transaction, the recorded entries include boththe initial transaction and the subsequent transac-tion. So, the entries for example 1(b) include boththe sale of the debt security under a repo by a resi-dent of A to a nonresident (1(a)), and the subsequentsale under a repo by the nonresident to another resi-dent of A (1(b)); the entries for example 1(c)include both the sale of the debt security under arepo by a resident of A to a nonresident (1(a)), andthe subsequent sale under a repo by the nonresidentto another nonresident (1(c)).

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6When equity securities are involved in reverse security transac-tions, external debt is affected only if the equity securities are usedas collateral to raise cash from a nonresident. In this instance, aloan is recorded.


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Table A2.1. External Debt: Recording of Reverse Security Transactions

Memorandum Items:Change in the Gross Debt Securities Acquired Under Reverse

External Debt Position Security Transactions: Change in the Position___________________________ ___________________________________________Debt Acquired by nonresidents Acquired by residents

securities Loans from residents from nonresidentsTransaction (+ = increase) (+ = increase) (+ = increase) (– = increase)

Example 1: Repurchase agreement (repo)

(a) Resident of A sells the security under a repo to a nonresident — +95 +100 —

(b) Following 1(a), the nonresident sells the security under a repo to another resident of A — +95 +100 –100

(c) Following 1(a), the nonresident sells the security under a repo to another nonresident — +95 +100 —

(d) Following 1(a), the nonresident sells the security outright to a resident of A –100 +95 +100 —

(e) Following 1(a), the nonresident sells the security outright to another nonresident — +95 +100 —

Example 2: Repurchase agreement (repo)(a) Resident of A buys the security under a

repo from a nonresident — — — –100(b) Following 2(a), the resident sells the security

under a repo to another resident of A — — — –100(c) Following 2(a), the resident sells the security

under a repo to a nonresident — +95 +100 –100(d) Following 2(a), the resident sells the security

outright to another resident — — — –100(e) Following 2(a), the resident sells the security

outright to a nonresident +100 — — –100

Example 3: Security loan(a) Resident of A “sells” the security under a

security loan to a nonresident — — +100 —(b) Following 3(a), the nonresident “sells” the

security under a security loan to another resident of A — — +100 –100

(c) Following 3(a), the nonresident “sells” the security under a security loan to another nonresident — — +100 —

(d) Following 3(a), the nonresident sells the security outright to a resident of A –100 — +100 —

(e) Following 3(a), the nonresident sells the security outright to another nonresident — — +100 —

Example 4: Security loan(a) Resident of A “buys” the security under a

securities loan from a nonresident — — — –100(b) Following 4(a), the resident “sells” the

security under a security loan to another resident of A — — — –100

(c) Following 4(a), the resident “sells” the security under a security loan to a nonresident — — +100 –100

(d) Following 4(a), the resident sells the security outright to another resident of A — — — –100

(e) Following 4(a), the resident sells the security outright to another nonresident +100 — — –100

A

Accrual of Interest Costs

Continuous recording of interest costs, so matchingthe cost of capital with the provision of capital.

Affiliated Enterprises

Enterprises related through direct investment owner-ship structures, such as branches, subsidiaries, asso-ciates, and joint ventures. Affiliated enterprisesinclude those in a direct ownership relationship butalso those that are related through a third enterpriseand/or a chain of direct investment relationships. Fora fuller exposition of direct investment relationships,see the OECD Benchmark Definition of ForeignDirect Investment (OECD, 1996, pp. 9–12).

Agreed Minute

Paris Club document detailing the terms for a debtrescheduling between creditors and the debtor. Itspecifies the coverage of debt-service payments(types of debt treated), the cutoff date, the consolida-tion period, the proportion of payments to berescheduled, the provisions regarding the down pay-ment (if any), and the repayment schedules forrescheduled and deferred debt. Creditor govern-ments commit to incorporate these terms in the bilat-eral agreements negotiated with the debtorgovernment that implements the Agreed Minute.Paris Club creditors will agree to reschedule onlywith countries that have an IMF upper credit tranchearrangement (Stand-By Arrangement or ExtendedFund Facility (EFF)), a Poverty Reduction andGrowth Facility (PRGF) arrangement, or a RightsAccumulation Program.

Amortization Schedule

The schedule for the repayment of principal andpayment of interest on an ongoing basis. For loans,

the amortization schedule is normally included in anannex to the contract or can be estimated from thecontract.

Arbitrage

Buying (or borrowing) in one market and selling (orlending) in the same or another market to profit frommarket inefficiencies or price differences.

Arrangement on Guidelines for OfficiallySupported Export Credits (OECD Consensus)

The Arrangement (sometimes known as the Consen-sus) is a gentleman’s agreement governing the provi-sion of officially supported export credits with acredit period of two years or more. It is negotiatedby an international body called the Participants tothe Arrangement on Guidelines for Officially Sup-ported Export Credits, which meets in Paris underthe auspices, and with the administrative support, ofthe Secretariat of the OECD. The Participants areAustralia, Canada, the European Union (includingall the Member States), Japan, Korea, New Zealand,Norway, Switzerland, and the United States. Addi-tionally, there are three Observers: the Czech Repub-lic, Hungary, and Poland.

B

Balance of Payments

The balance of payments is a statistical statementthat systematically summarizes, for a specific periodof time, the economic transactions of an economywith the rest of the world. Transactions, for the mostpart between residents and nonresidents, consist ofthose involving goods, services, and income; thoseinvolving financial claims and liabilities to the restof the world; and those (such as gifts) classified astransfers.

Appendix III. Glossary of External Debt Terms

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Bank for International Settlements (BIS)

Established in 1930 by intergovernmental conven-tion, the Bank for International Settlements pro-motes cooperation among central banks. In thiscapacity it carries out four main functions: it holdsand manages deposits from a large number of centralbanks throughout the world; it serves as a forum forinternational monetary cooperation; it assists asagent or trustee in the execution of various interna-tional financial agreements; and it carries outresearch and issues publications on monetary andeconomic subjects.

Berne Union

The International Union of Credit and InvestmentInsurers. This Union is an informal association ofexport credit insurance agencies, founded in 1934.The two main objectives of the Berne Union are thepromotion of the international acceptance of soundprinciples in export credit insurance and investmentinsurance, and the exchange of information relatingthereto. The almost 50 members meet twice a year toexchange information and seek to establish commonstandards, for instance on the appropriate down pay-ment and repayment periods for various kinds ofexports. Informal credit ratings of the borrowingcountries are maintained. They also consult witheach other on a continuing basis, and cooperateclosely. All members participate as insurers and notas representatives of their governments.

Bilateral Deadline

In the context of Paris Club reschedulings, the dateby which all bilateral agreements must be con-cluded. It is set in the Agreed Minute and is typicallyabout six months later, but can be extended uponrequest.

Bilateral Debt

Loans extended by a bilateral creditor.

Bilateral Rescheduling Agreements

Rescheduling agreements reached bilaterally betweenthe debtor and creditor countries. These are legallythe equivalent of new loan agreements. After a ParisClub rescheduling, such agreements are required toput into effect the debt restructuring set forth in themultinational Agreed Minute.

Bullet Repayment

The repayment of principal in a single payment atthe maturity of the debt.

Buyer’s Credit

A financial arrangement in which a bank or financialinstitution, or an export credit agency in the export-ing country, extends a loan directly to a foreignbuyer or to a bank in the importing country to payfor the purchase of goods and services from theexporting country. Also known as financial credit.This term does not refer to credit extended directlyfrom the buyer to the seller (for example, throughadvance payment for goods and services).

C

Capital Account

In the balance of payments, the capital account cov-ers capital transfers and the acquisition or disposalof nonproduced nonfinancial items (for example,patents).

Capital Transfers

Capital transfers consists of the transfer—without aquid pro quo—of ownership of a fixed asset or theforgiveness, by mutual agreement between creditorand debtor, of the debtor’s financial liability when nocounterpart is received in return by the creditor.

Capitalized Interest

Capitalized interest is the conversion of accrued inter-est costs or future interest payments, by a contractualarrangement with the creditor, into a new debt instru-ment or the principal amount. The most commonform of capitalization is the reinvestment of interestcosts into the principal amount, either because of anexplicit agreement regarding the specific debt instru-ment or as part of a rescheduling agreement. Fre-quently as part of a rescheduling agreement, somepercentage of interest due during the consolidationperiod (see below) is converted, through an agree-ment made with the creditor, into principal.

Claim Payments

Payments made to exporters or banks, after theclaims-waiting period, by an export credit agency on

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Appendix III • Glossary of External Debt Terms

insured or guaranteed loans when the original bor-rower or borrowing-country guarantor fails to pay.These are recorded by the agencies as unrecoveredclaims until they are recovered from the debtor orthe debtor’s guarantor.

Claims-Waiting Period

The period that exporters or banks must wait afterthe due-date of payment before the export creditagency will pay on the corresponding claim.

Cofinancing

The joint or parallel financing of programs or pro-jects through loans or grants to developing countriesprovided by commercial banks, export credit agen-cies, other official institutions in association withother agencies or banks, or the World Bank and othermultilateral financial institutions.

Commercial Credit

In the context of the Paris Club, loans originallyextended on terms that do not qualify as officialdevelopment assistance (ODA) credits. These aretypically export credits on market terms but alsoinclude other non-ODA loans by governments.

Commercial Interest Reference Rates (CIRRs)

A set of currency-specific interest rates for majorOECD countries. CIRRs have been established for13 currencies, the majority of which are based oneither the five-year government bond yields or onthree-, five- and seven-year bond yields, accordingto the length of the repayment period. CIRRs areadjusted monthly and are intended to reflect com-mercial rates.

Commercial Risk

In the context of export credits, the risk of nonpay-ment by a nonsovereign or private sector buyer orborrower in his or her domestic currency arisingfrom default, insolvency, and/or a failure to take upgoods that have been shipped according to the sup-ply contract (contrasted with transfer risk arisingfrom an inability to convert domestic currency intothe currency in which the debt service is payable, orwith broader political risk).

Commitment

Generally, a firm obligation to lend, guarantee, orinsure resources of a specific amount under specificfinancial terms and conditions. However, in theOECD’s Arrangement on Guidelines for OfficiallySupported Export Credits (see above), commitmentsimply refers to any statement, in whatever form,whereby the willingness or intention to provide offi-cial support is communicated to the recipient coun-try, the buyer, the borrower, the exporter, or thefinancial institution.

Commitment Charge (or Fee)

This is the charge made for holding available theundisbursed balance of a loan commitment. Typi-cally, it is a fixed-rate charge (for example, 1.5percent a year) calculated on the basis of the undis-bursed balance.

Commitment, Date of

The date on which the commitment is made.

Comparable Treatment

An understanding in a debt-restructuring agreementwith the Paris Club creditors that the debtor will secureat least equivalent debt relief from other creditors.

Complete Market

A financial market place is said to be complete whena market exists with an equilibrium price for everyasset in every possible state of the world.

Completion Point

In the context of the HIPC Initiative (see below),when the IMF and World Bank Executive Boardsdecide that a country has met the conditions forassistance under the Initiative. The timing of thecompletion point depends on the satisfactory imple-mentation of key structural policy reforms agreed atthe decision point, the maintenance of macroeco-nomic stability, and the adoption and implementa-tion of a poverty reduction strategy developedthrough a broad-based participatory process. (Seealso Decision Point.)

Concessional Loans

These are loans that are extended on terms substan-tially more generous than market loans. The conces-

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sionality is achieved either through interest ratesbelow those available on the market or by graceperiods, or a combination of these. Concessionalloans typically have long grace periods.

Concessional Restructuring

Debt restructuring with a reduction in present valueof the debt service. In the context of the Paris Club,concessional restructuring terms have been grantedto low-income countries since October 1988 with areduction in the present value of eligible debt of upto one-third (Toronto terms); since December 1991,with a present value reduction of up to one-half(London terms or “enhanced concessions” or“enhanced Toronto” terms); and, since January1995, with a present value reduction of up to two-thirds (Naples terms). In the context of the HIPC Ini-tiative, creditors agreed in November 1996 toincrease the present value reduction to up to 80 per-cent (Lyon terms) and then in June 1999 to 90 per-cent (Cologne terms). Such restructuring can be inthe form of flow restructuring or stock-of-debt oper-ations. While the terms (grace period and maturity)are standard, creditors can choose from a menu ofoptions to implement the debt relief.

Concessionality Level

A net present value calculation, measured at the timethe loan is extended, that compares the outstandingnominal value of a debt and the future debt-servicepayments discounted at an interest rate applicable tothe currency of the transaction, expressed as a per-centage of the nominal value of the debt. The con-cessionality level of bilateral debt (or tied aid) iscalculated in a similar manner, but instead of usingthe nominal value of the debt, the face value of theloan is used—that is, including both the disbursedand undisbursed amounts, and the difference iscalled the grant element. (See also Grant Elementand Net Present Value.)

Consolidated Amount or Consolidated Debt

The debt-service payments and arrears, or debtstock, restructured under a Paris Club reschedulingagreement.

Consolidated Reporting

Reporting covering the claims and liabilities of alloffices worldwide of the same entity, but excluding

positions between offices of the same entity. Officesinclude head offices, branch offices, and sub-sidiaries. A consolidated balance sheet refers to abalance sheet grouping of assets and liabilities of aparent company and all its offices, after eliminationof all unrealized profits on intragroup trading and ofall intragroup balances.

Consolidation Period

In Paris Club restructuring agreements, the period inwhich debt-service payments to be restructured (the“current maturities consolidated”) have fallen or willfall due. The beginning of the consolidation periodmay precede, coincide with, or come after the dateof the Agreed Minute. The standard consolidationperiod is one year, but sometimes debt paymentsover a two- or three-year period have been consoli-dated, corresponding with a multiyear arrangementwith the IMF.

Contingent Asset/Liability (Contingencies)

The principal characteristic of a contingency is thatone or more conditions must be fulfilled before afinancial transaction takes place.

Cover

Provision of export credit guarantee or insuranceagainst risks of payment delays or nonpaymentsrelating to export transactions. Cover is usually,though not always, provided for both commercialrisk and political risk. In most cases, cover is notprovided for the full value of future debt-servicepayments; the percentage of cover is typicallybetween 90 percent and 95 percent. (See also Quan-titative Limits.)

Coverage of Rescheduling Agreements

The debt service or arrears rescheduled. Comprehen-sive coverage implies the inclusion of most or all eli-gible debt service and arrears.

Credit

An amount for which there is a specific obligation ofrepayment. Credits include loans, trade credits,bonds, bills, etc., and other agreements that give riseto specific obligations to repay over a period of timeusually, but not always, with interest. Credit is

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extended to finance consumption and investmentexpenditures, and financial transactions.

Credit Guarantee

Commitment by an export credit agency to reim-burse a lender if the borrower fails to repay a loan.The lender pays a guarantee fee.

Credit Insurance

The main business of most export credit agencies isinsurance of finance provided by exporters or banks(although some major agencies lend on their ownaccount). Insurance policies provide for the exportcredit agency to reimburse the lender for losses up toa certain percentage of the credit covered and undercertain conditions. Lenders or exporters pay a pre-mium to the export credit agency. Insurance policiestypically protect the lender against political or trans-fer risks in the borrowing country that prevent theremittance of debt-service payments.

Creditor

An entity with a financial claim on another entity.

Creditor Country

The country in which the creditor resides. In ParisClub terminology, it is an official bilateral creditor.

Creditor Reporting System

A statistical reporting system, maintained by theOECD, to monitor the debt of developing countries.Major creditor countries, primarily the 22 membercountries of the Development Assistance Com-mittee (DAC), together with the European Commis-sion, supply information. The data are publishedin the OECD’s annual External Debt Statisticspublication.

Cross-Border Positions

Asset and liability positions of residents of an econ-omy vis-à-vis residents of all other economies.

Currency of Reporting

The unit of account in which amounts are reportedeither to the compiling agency and/or to an interna-

tional agency compiling debt statistics. See Chapter2 for details on unit of account.

Currency of Transaction

The medium of exchange in which an individualtransaction occurs. It may be currency, goods, or ser-vices. The medium of exchange of one transaction(for example, disbursement) does not necessarilydetermine the medium of exchange of another (forexample, repayment).

Current Account

The current account of the balance of payments cov-ers all transactions (other than those in financialitems) that involve economic values and occurbetween residents and nonresident entities. Alsocovered are offsets to current economic values pro-vided or acquired without a quid pro quo. Includedare goods, services, income, and current transfers.The balance on goods, services, income, and currenttransfers is commonly referred to as the “current bal-ance” or “current account” balance.

Current Maturities

In the context of restructuring agreements, principaland interest payments falling due in the consolida-tion period.

Current Transfers

Current transfers are all transfers—that is, the trans-fer of a real resource or a financial item without aquid pro quo—that are not transfers of capital. Cur-rent transfers directly affect the level of disposableincome and should influence the consumption ofgoods and services.

Cutoff Date

The date (established at the time of a country’s firstParis Club debt reorganization/restructuring) beforewhich loans must have been contracted in orderfor their debt service to be eligible for restructuring.New loans extended after the cutoff date are pro-tected from future restructuring (subordination strat-egy). In exceptional cases, arrears on post-cutoff-datedebt can be deferred over short periods of time inrestructuring agreements.

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D

De Minimis Creditors (or Clause)

Minor creditors that are exempted from debt restruc-turing to simplify implementation of the Paris Clubrestructuring agreements. Their claims are payablein full as they fall due. An exposure limit defining aminor creditor is specified in each Agreed Minute.

Debt- and Debt-Service-Reduction (DDSR)Operations

Debt-restructuring agreements are typically under-taken for bank loan debt obligations and involve thebuyback and exchange of eligible debt either forfinancial instruments that are valued at a substantialdiscount (simple cash buyback) or for new bonds fea-turing a present value reduction. In some instances,the principal portion of new financial instruments isfully collateralized with zero-coupon bonds issued bythe treasury of an industrial country, while interestobligations are also partially secured. DDSR opera-tions are characterized by a “menu approach,” allow-ing individual creditors to select from among severalDDSR options. Under the Brady plan of March 1989,some of these arrangements have been supported byloans from official creditors.

Debt Assumption

The assumption of a debt liability of one entity byanother entity, usually by mutual agreement.

Debt Buyback

The repurchase by a debtor of its own debt, usuallyat a substantial discount. The debtor’s obligationsare reduced while the creditor receives a once-and-for-all payment. Although in apparent contraventionof standard commercial bank loan agreements, somedebtors have bought back their own debt on the sec-ondary market.

Debt Conversion

The exchange of debt for a nondebt liability, such asequity, or for counterpart funds, such as can be usedto finance a particular project or policy.

Debt Default

Failure to meet a debt obligation payment, eitherprincipal or interest. A payment that is overdue or inarrears is technically “in default,” since by virtue of

nonpayment the borrower has failed to abide by theterms and conditions of the debt obligation. In prac-tice, the point at which a debt obligation is consid-ered “in default” will vary.

Debt-for-Charity Swap

The purchase by a nonprofit organization such as anongovernmental organization (NGO) of the exter-nal debt of a country at a discount in the secondarymarket, which the NGO then exchanges for localcurrency to be used for philanthropic purposes.

Debt-for-Commodity Swap

The repayment in kind by a debtor country of all orpart of its external debt. Typically, the lender takes aspecific, earmarked percentage of the receipts fromthe exports of a particular commodity or group ofcommodities to service the debt.

Debt-for-Development Swap

Financing part of a development project through theexchange of a foreign-currency-denominated debtfor local currency, typically at a substantial discount.The process normally involves a foreign nongovern-mental organization (NGO) that purchases the debtfrom the original creditor at a substantial discountusing its own foreign currency resources, and thenresells it to the debtor country government for thelocal currency equivalent (resulting in a further dis-count). The NGO in turn spends the money on adevelopment project, previously agreed upon withthe debtor country government.

Debt-for-Equity Swap

A transaction in which debt of an economy isexchanged, usually at a discount, for equity in anenterprise in the same economy. Although variablein form, such arrangements usually result in theextinction of a fixed-rate liability (for example, adebt security or loan) denominated in foreign cur-rency and the creation of an equity liability (denomi-nated in domestic currency) to a nonresident. Theremay be clauses in the agreement to prevent the repa-triation of capital before some specified future date.

Debt-for-Nature Swap

Similar to a debt-for-development swap, except thatthe funds are used for projects that improve theenvironment.

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Debt Forgiveness

The voluntary cancellation of all or part of a debtwithin a contractual arrangement between a creditorin one economy and a debtor in another economy.

Debt Instrument(s)

Existing debt instruments typically arise out of con-tractual relationships under which an institutionalunit (the debtor) has an unconditional liability toanother institutional unit (the creditor) to repay prin-cipal with or without interest, or to pay interest with-out principal. These instruments include debtsecurities, loans, trade credit, and currency anddeposits. Debt instruments may also be created bythe force of law—in particular, obligations to paytaxes or to make other compulsory payments—orthrough rights and obligations that results in a debtoraccepting an obligation to make future payment(s) toa creditor.

Debt-Reduction Option

Option under concessional Paris Club debt restruc-turings where creditors effect the required debtreduction in present value terms through a reductionof the principal of the consolidated amount. A com-mercial interest rate and standard repayment termsapply to the remaining amounts. (See ConcessionalRestructuring.)

Debt Refinancing

Debt refinancing refers to the conversion of the orig-inal debt including arrears, into a new debt instru-ment. In other words, overdue payments or futuredebt-service obligations are “paid off” using a newdebt obligation. In the Guide, as in BPM5, a changein the terms of a debt instrument is to be reported asthe creation of a new debt instrument, with the origi-nal debt extinguished.

Debt Relief

Any form of debt reorganization that relieves theoverall burden of debt. Debt relief results wherethere is a reduction in the present value of thesedebt-service obligations and/or a deferral of the pay-ments due, thus providing smaller near-term debt-service obligations. This can be measured, in mostcases, by an increase in the duration of these obliga-tions; that is, payments become weighted more

toward the latter part of the debt instrument’s life.However, if debt reorganization results in changes inpresent value and duration that are countervailing intheir impact on the debt burden, then there is no debtrelief, unless the net impact is significant—such ascould occur if there was a deep reduction in presentvalue (together with small decrease in duration) or asharp increase in duration (together with a smallincrease in present value).

Debt Reorganization/Restructuring

Debt reorganization arises from bilateral arrange-ments involving both the creditor and the debtor thatalter the terms established for the servicing of a debt.This includes debt rescheduling, refinancing, for-giveness, conversion, and prepayments.

Debt Rescheduling

Debt rescheduling refers to the formal deferment ofdebt-service payments and the application of newand extended maturities to the deferred amount.Rescheduling debt is one means of providing adebtor with debt relief through a delay and, in thecase of concessional rescheduling, a reduction indebt-service obligations.

Debt Service

Refers to payments in respect of both principal andinterest. Actual debt service is the set of paymentsactually made to satisfy a debt obligation, includingprincipal, interest, and any late payment fees. Sched-uled debt service is the set of payments, includingprincipal and interest, that is required to be madethrough the life of the debt.

Debt-Service (-to-Exports) Ratio

The ratio of debt service (interest and principal pay-ments due) during a year, expressed as a percentage ofexports (typically of goods and services) for that year.Forward-looking debt-service ratios require someforecast of export earnings. This ratio is considered tobe a key indicator of a country’s debt burden.

Debt-Service-Reduction Option

Option under concessional Paris Club debt resched-ulings where creditors effect the required debt reduc-tion in present value terms through a reduction in the

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applicable interest rate. (See Concessional Restruc-turing.)

Debt-Sustainability Analysis

A study of a country’s medium- to long-term debt sit-uation. A country’s eligibility for support under theHIPC Initiative is determined on the basis of such ananalysis, jointly undertaken by the staffs of the IMF,the World Bank, and the country concerned.

Debt Swaps

Debt swaps are exchanges of debt, such as loans orsecurities, for a new debt contract (that is, debt-to-debt swaps), or exchanges of debt-for-equity, debt-for-exports, or debt-for-domestic currency, such asto be used for projects in the debtor country (alsoknown as debt conversion).

Debt Workout

The process of working out a satisfactory methodwhereby the debtor country can repay external debt,including restructuring, adjustment, and the provi-sion of new money.

Debtor Country

The country in which the debtor resides.

Debtor Reporting System (DRS)

A statistical reporting system maintained by theWorld Bank to monitor the debt of developing coun-tries. Information is supplied through reports fromdebtor countries. The data supplied are the basis forthe annual World Bank report, Global DevelopmentFinance (formerly World Debt Tables).

Decision Point

In the context of the HIPC Initiative, the point atwhich a country’s eligibility for assistance is deter-mined by the IMF and World Bank Executive Boardson the basis of a debt-sustainability analysis andthree years of sound performance under IMF- andWorld Bank-supported adjustment programs. Theinternational community enters into a commitment atthe decision point to deliver assistance at the comple-tion point, provided that the debtor adheres to its pol-icy commitments. The debt-sustainability analysis is

essentially a medium-term balance of payments pro-jection that assesses the debt burden of the countryand its capacity to service those obligations. If exter-nal debt ratios for that country fall within or aboveapplicable targets, it will be considered for specialassistance: the target is 150 percent for the ratio ofthe present value of debt to exports, with exceptionsto this target in the special case of very openeconomies with a high debt burden in relation to fis-cal revenues. (See also Completion Point.)

At the decision point, the Executive Boards of theIMF and World Bank will formally decide on acountry’s eligibility, and the international commu-nity will commit to provide sufficient assistance bythe completion point for the country to achieve debtsustainability calculated at the decision point. Thedelivery of assistance committed by the IMF andBank will depend on satisfactory assurances ofaction by other creditors.

Deferred Payments

In the context of Paris Club debt reschedulings,obligations that are not consolidated but postponednonconcessionally, usually for a short time, as speci-fied in the Agreed Minute.

Development Assistance Committee (DAC)of the OECD

Established in 1960 as the Development AssistanceGroup, with the objective of expanding the volumeof resources made available to developing countriesand to improve their effectiveness. The DAC period-ically reviews both the amount and the nature of itsmembers’ contributions to aid programs, both bilat-eral and multilateral. The DAC does not disburseassistance funds directly, but is concerned insteadwith promoting increased assistance efforts by itsmembers. The members of the DAC are Australia,Austria, Belgium, Canada, Denmark, Finland,France, Germany, Greece, Ireland, Italy, Japan, Lux-embourg, the Netherlands, New Zealand, Norway,Portugal, Spain, Sweden, Switzerland, the UnitedKingdom, the United States, and the Commission ofthe European Communities.

Disbursed Loans

The amount that has been disbursed from a loan buthas not yet been repaid or forgiven.

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Disbursements

The transactions of providing financial resources.The two counterparties must record the transactionsimultaneously. In practice, disbursements arerecorded at one of several stages: provision of goodsand services (where trade credit is involved); placingof funds at the disposal of the recipient in an ear-marked fund or account; withdrawal of funds by therecipient from an earmarked fund or account; orpayment by the lender of invoices on behalf of theborrower. The term “utilized” may apply when thecredit extended is in a form other than currency. Dis-bursements should be recorded gross—the actualamount disbursed.

Domestic Currency

The domestic currency is that which is legal tenderin the economy and issued by the monetary authorityfor that economy, or for the common currency areato which the economy belongs.

Duration

Duration is the weighted average term to maturity of adebt instrument. The time period until the receipt/payment of each cash flow, such as six months, isweighted by the present value of that cash flow, as aproportion of the present value of total cash flowsover the life of the instrument. Present value can becalculated using the yield to maturity or another inter-est rate. The more the cash flows are concentratedtoward the early part of a debt instrument’s life, theshorter the duration relative to the time to maturity.

E

Eligible Debt or Debt Service

In the context of the Paris Club, debt that can berescheduled—namely, debt that is contracted beforethe cutoff date, with maturities of one year or longer.

Enhanced Concessions (or EnhancedTorontoTerms)

See Concessional Restructuring.

Enhanced Structural Adjustment Facility (ESAF)

See Structural Adjustment Facility (SAF). Renamedthe Poverty Reduction and Growth Facility (PRGF)in November 1999.

ESAF-HIPC Trust

A trust established by the IMF in February 1997 toprovide assistance to the countries deemed eligiblefor assistance under the HIPC Initiative by theBoards of the IMF and the World Bank. Through thistrust, the IMF will provide grants (or, in exceptionalcircumstances, highly concessional loans) that willbe used to retire a country’s obligations falling dueto the IMF after the completion point.

Escrow Accounts

In the context of external debt payments, accountstypically held in banks outside of the debtor countrythrough which a portion of the export proceeds of adebtor is channeled. Typically involve balances ofone-year maturity to cover future debt-service pay-ments. Creditors who are the beneficiaries of suchaccounts thus obtain extra security for their loansand effective priority in debt service.

Exceptional Financing

As an alternative to—or in conjunction with—theuse of reserve assets, IMF credit and loans, andliabilities constituting foreign authorities’ reserves,to deal with payments imbalance, exceptionalfinancing denotes any other arrangements madeby the authorities of an economy to finance balanceof payments needs. The identification of excep-tional financing transactions is linked to ananalytical concept rather than being based onprecise criteria. Among the transactions regardedas exceptional financing transactions are debtforgiveness, debt-for-equity swaps, and other typesof transactions relating to debt reorganizations.Under certain circumstances, some borrowings bythe government or other sectors might meet thecriterion.

Export Credit

A loan extended to finance a specific purchaseof goods or services from within the creditorcountry. Export credits extended by the supplierof goods—such as when the importer of goodsand services is allowed to defer payment—are known as supplier’s credits; export creditsextended by a financial institution, or an exportcredit agency in the exporting country are known asbuyer’s credits. (See also Officially SupportedExport Credits.)

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Export Credit Agency

An agency in a creditor country that provides insur-ance, guarantees, or loans for the export of goodsand services.

Extended Fund Facility (EFF)

An IMF lending facility established in 1974 to assistmember countries in overcoming balance of pay-ments problems that stem largely from structuralproblems and require a longer period of adjustmentthan is possible under a Stand-By Arrangement. Amember requesting an Extended Arrangement out-lines its objectives and policies for the whole periodof the arrangement (typically three years) and pre-sents a detailed statement each year of the policiesand measures it plans to pursue over the next 12months. The phasing and performance criteria arecomparable to those of Stand-By Arrangements,although phasing on a semiannual basis is possible.Countries must repay EFF resources over a period of4!/2 to 10 years. (See Stand-By Arrangement.)

External Debt

Gross external debt, at any given time, is the out-standing amount of those actual current, and notcontingent, liabilities that require payment(s) ofinterest and/or principal by the debtor at somepoint(s) in the future and that are owed to nonresi-dents by residents of an economy.

F

Face Value

The amount of principal to be repaid (for example,the redemption amount of a bond). Sometimes calledinitial contractual value, for loans, the face value isthe original amount of the loan as stated in the loancontract. If the loan is not fully disbursed, then theface value will include future disbursements, just asthe face value of a zero-coupon bond includes inter-est that has not yet accrued.

Financial Account

The financial account of the balance of paymentsconsists of the transactions in foreign financialassets and liabilities of an economy. The foreignfinancial assets of an economy consist of holdings

of monetary gold, IMF Special Drawing Rights, andclaims on nonresidents. The foreign liabilities of aneconomy consist of claims of nonresidents on resi-dents. The primary basis for classification of thefinancial account is functional: direct, portfolio, andother investment, financial derivatives, and reserveassets.

Financial Asset

Financial assets are stores of value, over which own-ership rights are enforced and from which their own-ers may derive economic benefits—such as propertyincome and/or holding gains and losses—by holdingthem over a period of time. Most financial assets dif-fer from other assets in the system of nationalaccounts in that they have counterpart liabilities onthe part of another institutional unit.

Financial Claim

A financial claim (1) entitles a creditor to receive apayment, or payments, from a debtor in circum-stances specified in a contract between them; or(2) specifies between the two parties certain rights orobligations, the nature of which requires them to betreated as financial.

Financial Derivatives

Financial derivatives are financial instruments thatare linked to a specific financial instrument or indi-cator or commodity, and through which specificfinancial risks can be traded in financial markets intheir own right. The value of a financial derivativederives from the price of an underlying item, such asan asset or index. Unlike debt instruments, no princi-pal amount is advanced to be repaid, and no invest-ment income accrues. Financial derivatives are usedfor a number of purposes including risk manage-ment, hedging, arbitrage between markets, andspeculation. Transactions in financial derivativesshould be treated as separate transactions rather thanintegral parts of the value of underlying transactionsto which they may be linked.

Financial Liability

A financial liability (1) requires a debtor to make apayment, or payments, to a creditor in circumstancesspecified in a contract between them; or (2) specifiesbetween the two parties certain rights or obligations,

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the nature of which requires them to be treated asfinancial.

Flag-of-Convenience Countries

Countries with favorable tax rules and other regula-tions attracting companies whose main business(originally, primarily shipping—but increasingly,production or services) is outside the country.

Flow Rescheduling

In the context of the Paris Club, the rescheduling ofspecified debt service falling due during the consoli-dation period and, in some cases, of specifiedarrears outstanding at the beginning of the consoli-dation period. (See Stock-of-Debt Operation.)

Foreign Currency

In this Guide, a foreign currency is a currency otherthan the domestic currency.

Forfaiting

A mechanism, most commonly used in medium- andlong-term credit, involving the purchase of promis-sory notes or bills of exchange by the forfaiter, at adiscount. Banks or other financial services entitiesoften own forfait companies.

Fund Credit

See Use of IMF Credit and Loans in Appendix I.

G

Geographical Distribution of the Flows ofFinancial Resources to Aid Recipients (Annual)

An annual publication of the OECD that shows thesources of official development financing to indi-vidual developing countries and territories. Includedin this publication are detailed data on the geo-graphical distribution of net and gross disburse-ments, commitments, terms, and the sectoralallocation of commitments.

Goodwill Clause

Clause used in Paris Club agreements under whichcreditors agree in principle, but without commit-

ment, to consider favorably subsequent debt-reliefagreements for a debtor country that remains incompliance with the restructuring agreement as wellas with its IMF arrangement, and has sought compa-rable debt relief from other creditors. The clause canbe intended for a future flow restructuring or a stock-of-debt operation.

Grace Period and Maturity

The grace period for principal is the period from thedate of signature of the loan or the issue of the finan-cial instrument to the first repayment of principal.The repayment period is the period from the first tolast repayment of principal. Maturity is the sum ofboth periods: grace plus repayment periods.

Graduated Payments (or “BlendedPayments”)

In the context of Paris Club reschedulings, the termrefers to a repayment schedule where principalrepayments gradually increase over the repaymentperiod, reflecting an expected improvement in therepayment capacity of a debtor country. Creditorshave made increasing use of the graduated pay-ments, replacing flat payment schedules where equalamounts of principal repayments were made over therepayment period: from the creditor perspective,graduated payments provide for principal repay-ments starting earlier, and, from the debtor perspec-tive, they avoid a large jump in debt service.

Grant Element

Measure of the concessionality of a loan, calculatedas the difference between the face value of the loanand the sum of the discounted future debt-servicepayments to be made by the borrower expressed as apercentage of the face value of the loan. A 10 per-cent rate of discount is used by the DevelopmentAssistance Committee (DAC) and the World Bank tomeasure the grant element of official loans. (See alsoDevelopment Assistance Committee, Concessional-ity Level, and Official Development Assistance.)

Grant-Like Flows

Loans for which the original agreement stipulatesthat payments to service the debt are to be placedinto an account in the borrowing country and usedin the borrowing country to the benefit of that

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country. These transactions are treated as grantsin the OECD-DAC statistics because their repay-ment does not require a flow of foreign cur-rency across the exchanges. They are neverthelesscounted as external debt because the creditor isnonresident.

(The classification of these transactions as grants isnot consistent with BPM5 recommendations. InBPM5, grants are regarded as transfers: transactionswhere a real resource or financial item is providedbut no quid pro quo is received. In the above transac-tion, in return for a reduction in outstanding debt,domestic currency is provided.)

Gross Domestic Product (GDP)

Essentially, the sum of the gross value added of allresident producer units. For further details, see 1993SNA, paragraphs 2.171–2.174.

Gross National Product (GNP)

GDP plus net income from abroad. For furtherdetails, see 1993 SNA, paragraphs 7.16 and 7.17. Inthe 1993 SNA, GNP was renamed gross nationalincome.

H

Heavily Indebted Poor Countries (HIPCs)

Group of 41 developing countries classified as beingheavily indebted poor countries. These are thosecountries that are eligible for highly concessionalassistance from the International Development Asso-ciation (IDA), and from the IMF’s Poverty Reduc-tion and Growth Facility (PRGF, previously theEnhanced Structural Adjustment Facility, ESAF),and that face an unsustainable debt situation evenafter the full application of traditional debt-reliefmechanisms.

Helsinki Package

Agreement that came into force in 1992. Thisagreement prohibits (with some exceptions) the pro-vision of tied aid loans to high-income countries(based on World Bank per capita income), and forcommercially viable projects. (See also Arrange-ment on Guidelines for Officially Supported ExportCredits.)

High-Income Countries

The World Bank classifies as high-income thosecountries with GNP per capita income of $9,266 ormore in 2000.

HIPC Initiative

Framework for action to resolve the external debtproblems of heavily indebted poor countries(HIPCs) that was developed jointly by the IMF andthe World Bank and was adopted in September1996. The Initiative envisaged comprehensiveaction by the international financial community,including multilateral institutions, to reduce to sus-tainable levels the external debt burden on HIPCs,provided they build a track record of strong policyperformance.

Following a comprehensive review of the HIPC Ini-tiative, a number of modifications to the Initiativewere approved in September 1999 to provide faster,deeper, and broader debt relief and strengthen thelinks between debt relief, poverty reduction, andsocial policies.

HIPC Trust Fund

The Trust Fund administered by the InternationalDevelopment Association (IDA) to provide grantsto eligible heavily indebted poor countries (HIPCs)for relief on debt owed to participating multi-laterals. The Trust Fund will either prepay, or pur-chase, a portion of the debt owed to a multilateralcreditor and cancel such debt, or pay debt service,as it comes due. The HIPC Trust Fund receivescontributions from participating multilateral credi-tors and from bilateral donors. Contributions can beearmarked for debt owed by a particular debtor orto a particular multilateral creditor. Donors canalso provide contributions to an unallocated pooland participate in decisions regarding the use ofthese unallocated funds. The Trust Fund allowsmultilateral creditors to participate in the TrustFund in ways consistent with their financial policiesand aims to address the resource constraints for cer-tain multilateral creditors. (See also ESAF-HIPCTrust.)

Home Country

The country of residence of the head office of theinstitutional entity.

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Host Country

The country in which the institutional entity islocated.

Houston Terms

See Lower-Middle-Income-Country Terms.

I

IMF Adjustment Program

An adjustment program in a member country of theIMF. An IMF-supported program is a detailed eco-nomic program that is based on an analysis of theeconomic problems of the member country. It speci-fies the policies being implemented or that will beimplemented by the country in the monetary, fiscal,external, and structural areas, as necessary, in orderto achieve economic stabilization and set the basisfor self-sustained economic growth. It usually,though not necessarily, refers to a program that issupported by the use of IMF resources.

IMF Arrangement

Agreement between the IMF and a member countryon the basis of which the IMF provides financialassistance to a member country seeking to redressits balance of payments problems and to help cush-ion the impact of adjustment. Nonconcessionalresources are provided mainly under Stand-ByArrangements and the Extended Fund Facility(EFF), and concessional resources are providedunder the Poverty Reduction and Growth Facility(PRGF).

Institutional Sector

The grouping of institutional units with commoneconomic objectives and functions. (See also SectorClassification.)

Institutional Unit

In the 1993 SNA institutional units are the entitiesthat undertake the activities of production, consump-tion, and the accumulation of assets and liabilities.In other words, economic activity involves transac-tions between institutional units be they householdsor corporations. An institutional unit is defined in the

1993 SNA as “an economic entity that is capable, inits own right, of owning assets, incurring liabilitiesand engaging in economic activities and in transac-tions with other entities” (1993 SNA, paragraph4.2).

Insured (Guaranteed) Export Credit

An export credit that carries a guarantee, issued byan export credit agency, protecting the creditoragainst political, commercial, or transfer risks in thedebtor country that may prevent the remittance ofdebt-service payments. (See also Export CreditAgency.)

Interbank Positions

Asset and liability positions that banks have withother banks.

Interest

For the use of principal, interest can, and usuallydoes, accrue on the principal amount, resulting in aninterest cost for the debtor. When this cost is paidperiodically, as commonly occurs, it is known in thisGuide as an interest payment. Interest can be calcu-lated either on a fixed-interest-rate or on a variable-interest-rate basis. In this Guide, in contrast to afixed interest rate, which remains unchanged over aperiod of years, a variable interest rate is linked to areference index (for example, the London interbankoffered rate, LIBOR), or the price of a specific com-modity, or the price of a specific financial instrumentthat normally changes over time in a continuousmanner in response to market pressures. (See alsoPrincipal.)

International Bank for Reconstructionand Development (IBRD)

The International Bank for Reconstruction andDevelopment (IBRD) was set up as an intergovern-mental financial institution in 1946 as a result of theBretton Woods Accord. It is the original agency ofthe World Bank Group and is commonly referred toas the World Bank. (See also World Bank Group.)

International Banking Business (BIS Data)

For these data, the term “international” refers tobanks’ transactions in any currency with nonresi-

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dents plus their transactions in foreign (nonlocal)currency with residents.

International Development Association (IDA)

IDA, established in 1960, is the concessional lendingarm of the World Bank Group. IDA provides low-income developing countries with long-term loanson highly concessional terms: typically a 10-yeargrace period, a 40-year repayment period, and only asmall servicing charge.

International Interbank Market

An international money market in which bankslend to each other—either cross-border or locallyin foreign currency—large amounts of funds, usu-ally at short term (between overnight and sixmonths).

International Investment Position (IIP)

The IIP is the stock of external financial assets andliabilities on a specified reference date, usually theend of the quarter or year. The change in positionbetween two end-periods reflects financial transac-tions, valuation changes, and other adjustmentsoccurring during the period.

International Monetary Fund (IMF)

Following the Bretton Woods Accords and estab-lished in 1945, the IMF is a cooperative intergovern-mental monetary and financial institution with 184member countries. Its main purpose is to promoteinternational monetary cooperation so to facilitatethe growth of international trade and economicactivity more generally. The IMF provides financialresources to enable its members to correct paymentsimbalances without resorting to trade and paymentsrestrictions.

International Security IdentificationNumber (ISIN)

The ISIN is a unique international security codeissued by National Numbering Agencies (NNAs) tosecurities issued in their jurisdiction. The Associa-tion of National Numbering Agencies (ANNA) is theauthority responsible for coordinating all aspects ofthe implementation of the ISIN numbering system.More information on the ISIN code system is avail-

able in Appendix VII of the IMF’s Coordinated Port-folio Investment Survey Guide, 2nd ed. (IMF, 2002).

J

Joint Venture

An enterprise in which two or more parties holdmajor interests.

L

Late Interest Charges

The additional interest that may be levied on obliga-tions overdue beyond a specified time; in some ParisClub agreements, late interest charges have beenspecifically excluded from the debt consolidation.

Leverage

Having exposure to the full benefits arising fromholding a position in a financial asset, without hav-ing to fully fund the position with own funds.

Line of Credit

An agreement that creates a facility under which oneunit can borrow credit from another up to a specifiedceiling usually over a specified period of time. Linesof credit provide a guarantee that funds will be avail-able, but no financial asset/liability exists until fundsare actually advanced.

Loan Agreement

The legal evidence and terms of a loan.

Loan Guarantee

A legally binding agreement under which the guar-antor agrees to pay any or all of the amount due on aloan instrument in the event of nonpayment by theborrower.

London Club

A group of commercial banks whose representativesmeet periodically to negotiate the restructuring ofdebts of sovereign borrowers. There is no organiza-tional framework for the London Club comparableto that of the Paris Club.

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London Interbank Offered Rate (LIBOR)

The London interbank offered rate for deposits, suchas the six-month dollar LIBOR. LIBOR is a refer-ence rate for the international banking markets andis commonly the basis on which lending margins arefixed. Thus, an original loan agreement or a resched-uling agreement may set the interest rate to the bor-rower at six-month dollar LIBOR plus 1.5 percent,with semiannual adjustments for changes in theLIBOR rate. Also, interest rate swap rates are quotedin reference to LIBOR; that is, the quoted rate is thefixed-rate side of the swap because the floating-rateside is LIBOR.

London Terms


Long-Maturities Option

In the context of the Paris Club, an option underwhich the consolidated amount is rescheduled over along period of time, but without a reduction in thepresent value of the debt.

Long-Term External Debt

External debt that has a maturity of more than oneyear. Maturity can be defined either on an original orremaining basis. (See also Original Maturity andRemaining Maturity.)

Low-Income Countries

In the context of the Paris Club, countries eligible toreceive concessional terms. The Paris Club decideseligibility on a case-by-case basis, but only countrieseligible to receive highly concessional IDA creditsfrom the World Bank Group are included. The WorldBank classifies as low-income those countries withGNP per capita income of $755 or less in 2000.

Lower-Middle-Income-Country Terms

In the context of the Paris Club, refers to therescheduling terms granted, since September 1990,to lower-middle-income countries. These terms arenonconcessional and originally provided for flatrepayment schedules, but in recent years graduatedpayment schedules have often been agreed upon forcommercial credits, namely, with a maturity of up to18 years, including a grace period of up to 8 years.

Official development assistance credits are resched-uled over 20 years, including a grace period of up to10 years. This set of rescheduling terms alsoincludes the limited use of debt swaps on a voluntarybasis. The World Bank classifies as lower-middleincome those countries with GNP per capita incomeof between $756 and $2,995 in 2000.

Lyon Terms


M

Market Valuation

Amounts of money that willing buyers pay toacquire something from willing sellers; theexchanges are made between independent parties onthe basis of commercial considerations only. Themarket value of a debt instrument should be basedon the market price for that instrument prevailing atthe time to which the position statement refers; thatis, current market prices as of the dates involved(beginning or end of the reference period). Chapter 2provides more details. (See also Nominal Value.)

Maturity Date (Final)

The date on which a debt obligation is contracted tobe extinguished. (See also Original Maturity andRemaining Maturity.)

Maturity Structure

A time profile of the maturities of claims or liabili-ties. Also known as “maturity profile” or “maturitydistribution.”

Mixed Credits

A credit that contains an aid element, so as to pro-vide concessional credit terms—such as a lower rateof interest or a longer credit period.

Moratorium Interest

Interest charged on rescheduled debt. In the ParisClub, moratorium interest rates are negotiated bilat-erally between the debtor and creditor countries andthus can differ among creditors. In the London Club,where all creditors are deemed to have access to

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funds at comparable rates, the moratorium interestrate applies equally to all rescheduled obligationsunder an agreement.

Multilateral Creditors

These creditors are multilateral institutions such asthe IMF and the World Bank, as well as other multi-lateral development banks.

Multiyear Rescheduling Agreement (MYRA)

An agreement granted by official creditors that cov-ers consolidation periods of two or more years inaccordance with multiyear IMF arrangements, suchas the Extended Fund Facility (EFF) and the PovertyReduction and Growth Facility (PRGF). The modali-ties of the agreement are that a succession of shorterconsolidations (tranches) are implemented after cer-tain conditions specified in the Agreed Minute aresatisfied, such as full implementation to date of therescheduling agreement and continued implementa-tion of the IMF arrangements.

N

Naples Terms


Nationality

Country of residence of the head office of an institu-tional entity.

National Numbering Agencies (NNAs)

NNAs have the sole right to allocate InternationalSecurity Identification Number (ISIN) codes to secu-rities within their own jurisdiction.

Net Flow

From the viewpoint of a loan, the net flow is grossdisbursements less principal repayments.

Net Present Value (NPV) of Debt

The nominal amount outstanding minus the sum ofall future debt-service obligations (interest and prin-cipal) on existing debt discounted at an interest ratedifferent from the contracted rate.

The concept is closely related to that of opportunitycost: if the debtor has a loan that bears a 3 percentrate of interest, it is clear that the debtor is better offthan by borrowing at 10 percent. But by discountingthe future debt-service obligations at 10 percent andcomparing the outcome with the amount borrowed,the NPV will tell how much the opportunity to bor-row at 3 percent, rather than at 10 percent, is worthto the debtor. The NPV can be used to assess theprofitability of buying back bonds, although accountneeds to be taken of how the buyback is to befinanced.

The Development Assistance Committee (DAC)OECD grant element is an NPV concept, since thegrant element is the percentage that the NPV, using a10 percent rate of discount, represents of the facevalue of the loan. In the context of the Paris Cluband the HIPC Initiative, sometimes present value ismisdescribed as NPV. (See Present Value, Conces-sionality Level, and Grant Element.)

Net Resource Transfer

A net resource transfer is a current account deficitexcluding any net interest payments.

Nominal Value

The nominal value of a debt instrument is theamount that at any moment in time the debtor owesto the creditor at that moment; this value is typicallyestablished by reference to the terms of a contractbetween the debtor and creditor. The nominal valueof a debt instrument reflects the value of the debt atcreation, and any subsequent economic flows, suchas transactions (for example, repayment ofprincipal), valuation changes (independent ofchanges in its market price), and other changes.Conceptually, the nominal value of a debt instrumentcan be calculated by discounting future interest andprincipal payments at the existing contractual inter-est rate(s) on the instrument; the latter may be fixed-rate or variable-rate. Chapter 2 provides moredetails. (See also Market Valuation.)

Nonconsolidated Debt

The debt that is wholly or partly excluded fromrescheduling. It has to be repaid on the terms onwhich it was originally borrowed, unless creditorsagree otherwise.

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Notional (Nominal) Amount of a FinancialDerivatives Contract

The notional amount is that underlying a financialderivatives contract and is necessary for calculatingpayments or receipts, but which may or may not beexchanged.

O

OECD Working Party on Export Creditsand Credit Guarantees

This is a forum for discussing export credit issuesand for exchanging information among 28 of the 29member countries of the OECD (only Iceland doesnot participate).

Official Development Assistance (ODA)

Flows of official financing administered with thepromotion of the economic development and wel-fare of developing countries as the main objective,and which are concessional in character with agrant element of at least 25 percent (using a fixed10 percent rate of discount). By convention, ODAflows comprise contributions of donor governmentagencies, at all levels, to developing countries(“bilateral ODA”) and to multilateral institutions.ODA receipts comprise disbursements by bilateraldonors and multilateral institutions. Lending byexport credit agencies—with the pure purpose ofexport promotion—is excluded.

Official Development Assistance (ODA) Loans

Loans with a maturity of over one year meeting thecriteria set out in the definition of ODA, provided bygovernments or official agencies and for whichrepayment is required in convertible currencies or inkind.

Official Development Bank

A nonmonetary financial intermediary controlled bythe public sector. It primarily engages in makinglong-term loans that are beyond the capacity or will-ingness of other financial institutions.

Official Development Finance (ODF)

Total official flows to developing countries exclud-ing (1) officially supported export credits, (2) official

support for private export credits (both are regardedas primarily trade promoting rather than develop-ment oriented), and (3) grants and loans for nonde-velopmental purposes. ODF comprises officialdevelopment assistance (ODA) and other officialdevelopment finance flows.

Officially Supported Export Credits

Loans or credits to finance the export of goods andservices for which an official export credit agency inthe creditor country provides guarantees, insurance,or direct financing. The financing element—asopposed to the guarantee/insurance element—can beextended by an exporter (supplier’s credit), orthrough a commercial bank in the form of trade-related credit provided either to the supplier, or tothe importer (buyer’s credit). It can also be extendeddirectly by an export credit agency of the exportingcountries, usually in the form of medium-termfinance as a supplement to resources of the privatesector, and generally for export promotion for capitalequipment and large-scale, medium-term projects.Under the rules of the Arrangement on Guidelinesfor Officially Supported Export Credits coveringexport credits with duration of two years or more, upto 85 percent of the export contract value can be offi-cially supported.

Offshore Financial Center

Countries or jurisdictions with financial centers thatcontain financial institutions that deal primarily withnonresidents and/or in foreign currency on a scaleout of proportion to the size of the host economy.Nonresident-owned or -controlled institutions play asignificant role within the center. The institutions inthe center may well gain from tax benefits not avail-able to those outside the center.

Organisation for Economic Co-operation andDevelopment (OECD)

The OECD provides governments of its membercountries with a setting in which to discuss, develop,and perfect economic and social policy. Theexchanges may lead to agreements to act in a formalway, but more often, the discussion makes for better-informed work within government on the spectrumof public policy and clarifies the impact of nationalpolicies on the international community. The chanceto reflect and exchange perspectives with other

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countries similar to their own is provided. TheOECD’s objectives are to promote growth, employ-ment, free trade, and a rising standard of living inboth member countries and nonmember countries.

Original Maturity

The period of time from when the financial asset/lia-bility was created to its final maturity date.

Other Official Flows (OOFs)

Official flows of a creditor country that are notundertaken for economic development purposes or,if they are mainly for development, whose grant ele-ment is below the 25 percent threshold that wouldmake them eligible to be recorded as ODA. Theyinclude export credits extended or rescheduled bythe official sector.

Own Offices

Different offices of the same entity, including headoffices, branch offices, and subsidiaries. Also some-times called “related offices.”

P

Paris Club

An informal group of creditor governments that hasmet regularly in Paris since 1956 to reschedule bilat-eral debts; the French treasury provides the secre-tariat. Creditors meet with a debtor country toreschedule its debts as part of the international sup-port provided to a country that is experiencing debt-servicing difficulties and is pursuing an adjustmentprogram supported by the IMF. The Paris Club doesnot have a fixed membership, and its meetings areopen to all official creditors that accept its practicesand procedures. The core creditors are mainlyOECD member countries, but other creditors attendas relevant for a debtor country. Russia became amember in September 1997.

Political Risk

The risk of nonpayment on an export contract orproject due to action taken by the importer’s hostgovernment. Such action may include interventionto prevent transfer of payments, cancellation of alicense, or events such as war, civil strife, revolution,

and other disturbances that prevent the exporter fromperforming under the supply contract or the buyerfrom making payment. Sometimes physical disasterssuch as cyclones, floods, and earthquakes comeunder this heading.

Post-Cutoff-Date Debt

See Cutoff Date.

Poverty Reduction and Growth Facility (PRGF)

An IMF facility known until November 1999 as theEnhanced Structural Adjustment Facility (ESAF).The PRGF is available to those countries that are fac-ing protracted balance of payments problems and areeligible to borrow on concessional terms under theInternational Development Association (IDA). ThePRGF supports programs that are consistent withstrategies elaborated by the borrowing country in aPoverty Reduction Strategy Paper (PRSP). The PRSPis a comprehensive, nationally owned strategy that isprepared by the borrowing country and endorsed intheir respective areas of responsibility by the Boardsof the IMF and World Bank. Funds are provided at anannual interest rate of 0.5 percent. They are repayableover 10 years, including a grace period of 5!/2 years.(See Structural Adjustment Facility.)

Premium

In the context of export credits, the amount paid, usu-ally in advance, by the party to an export agency for itsfacilities. Cover will often not be fully effective untilthe premium has been paid. Premiums are normallycalculated on the basis of the exposure, length ofcredit, and the riskiness of transacting with the import-ing country. Premium income, an important source ofrevenue for export credit agencies, is intended to coverthe risk of nonpayment of the credit.

Prepayment

The partial or full repayment by the borrower, per-haps at a discount, of an outstanding debt obligationin advance of the maturity date. The prepaymentmay be at a discount from the current outstandingprincipal amount.

Present Value

The present value is the discounted sum of all futuredebt service at a given rate of interest. If the rate of

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interest is the contractual rate of the debt, by con-struction, the present value equals the nominal value,whereas if the rate of interest is the market interestrate, then the present value equals the market valueof the debt.

In debt-reorganization discussions, the present valueconcept is used to measure, in a consistent manner,the burden sharing of debt reduction among creditors.This can be illustrated by the following example.

Debtor A owes 100 to both creditor B and creditor C.The maturity of both loans is the same. Creditor B’sloan has an interest rate of 3 percent and that of C aninterest rate of 6 percent. The “market rate” isassumed to be 8 percent—that is, B and C couldhave lent the money at this higher rate. So, for bothB and C, the opportunity cost of lending at theirrespective interest rates, rather than at the marketrate, can be calculated by discounting future pay-ments at the market rate of 8 percent (present value),and comparing the outcome with the outstandingnominal value of 100. If PV(B) represents the pre-sent value for B and PV(C) represents the presentvalue for C, then:

PV(B) < PV(C) < 100

PV(B) is less than PV(C) because the size of thefuture payments to be made by A to B is less thanthose to be made to C. In turn, the payments by A toC are less than would have been the case if a marketrate of interest had been charged. This is illustratedby the annual interest payments. Debtor A wouldannually pay 3 to B; 6 to C; and 8 at the market rateof interest.

In deciding upon burden sharing of debt reduction,since B’s claims on A are already lower than those ofC, despite the same nominal value, debt reductionrequired from B might well be less than that requiredfrom C. So, it can be seen that by using a commoninterest rate to discount future payments, the burdenon the debtor of each loan can be quantified in acomparable manner.

Present Value of Debt-to-Exports Ratio (PV/X)

Present value (PV) of debt as a percentage ofexports (usually of goods and services) (X). In thecontext of the Paris Club and HIPC Initiative, some-times present value is misdescribed as net present

value (NPV). In this context NPV/X has the samemeaning as PV/X.

Previously Rescheduled Debt

Debt that has been rescheduled on a prior occasion.This type of debt was generally excluded from fur-ther rescheduling in both the Paris and London Clubsuntil 1983. Since then, however, previously resched-uled debt has frequently been rescheduled again forcountries facing acute payment difficulties.

Principal

The provision of economic value by the creditor, orthe creation of debt liabilities through other means,establishes a principal liability for the debtor, which,until extinguished, may change in value over time.For debt instruments alone, for the use of the princi-pal, interest can, and usually does, accrue on theprincipal amount, increasing its value.

Principal Repayment Schedule

The repayment schedule of principal by due dateand installment amount.

Private Creditors

Creditors that are neither governments nor publicsector agencies. These include private bondholders,private banks, other private financial institutions,and manufacturers, exporters, and other suppliers ofgoods that have a financial claim.

Provisioning

Funds set aside in an entity’s account for potentiallosses arising from financial claims that are not ser-viced by the debtor, and/or from claims on the entityarising out of insurance cover and/or guaranteesgiven. In many export credit agencies’ accounts, pro-visions are divided into general and specific provi-sions. General provisions apply to the overallbusiness, while specific provisions are on a case-by-case basis. Banks make provisions.

Public Debt

The debt obligations of the public sector.

Public External Debt

The external debt obligations of the public sector.

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Q

Quantitative (or Cover) Limits

A ceiling on the amount of insurance or credit thatan export credit agency will provide under certaincircumstances. Limits can apply to individual buyersor to total exposure on buying countries or to maxi-mum contract sizes.

R

Recoveries

Repayments made to an export credit agency by aborrowing country after the agency has paid out onclaims by exporters or banks.

Refinancing

See Debt Refinancing.

Reinsurance by Export Credit Agencies

Export credit agencies may reinsure amounts origi-nally insured by a private sector insurer or commer-cial bank (some large official agencies are alsoproviding reinsurance for smaller official agencies).For example, a private insurer might keep the com-mercial risk of a loan on its own books, but seekreinsurance against specific political risks. Also,some export credit agencies may receive reinsurancefrom their governments or purchase it in the privatereinsurance market.

Remaining (Residual) Maturity

The period of time until debt payments fall due. Inthe Guide, it is recommended that short-termremaining maturity of outstanding external debt bemeasured by adding the value of outstanding short-term external debt (original maturity) to the value ofoutstanding long-term external debt (original matu-rity) due to be paid in one year or less.

Repayment Period

The period during which the debt obligation is to berepaid.

Rephasing

A revision of the terms of repayment of a debtobligation.

Reporting Banks

In BIS terminology, all those deposit-taking institu-tions (plus some non-deposit-taking financial institu-tions) that submit data to be included in the BISInternational Banking Statistics.

Repudiation of Debt

A unilateral disclaiming of a debt instrument obliga-tion by a debtor.

Rescheduling

See Debt Rescheduling.

Rescheduling Agreement

An agreement between a creditor, or a group of cred-itors, and a debtor to reschedule debt. This term issometimes used loosely to apply to a debt-reorgani-zation/restructuring agreement, one element ofwhich is rescheduling.

Rights Accumulation Program

An IMF program of assistance established in 1990whereby a member country with long overdue oblig-ations to the IMF, while still in arrears, may accumu-late “rights” toward a future disbursement from theIMF on the basis of a sustained performance underan IMF-monitored adjustment program. Countriesincurring arrears to the IMF after end-1989 are noteligible for assistance under this program. RightsAccumulation Programs adhere to the macroeco-nomic and structural policy standards associatedwith programs supported by the Extended FundFacility (EFF) and the Poverty Reduction andGrowth Facility (PRGF), and performance is moni-tored, and rights accrue, quarterly.

S

Sector Classification

In the 1993 SNA and BPM5, institutional sectors areformed by the grouping of similar kinds of institu-tional units according to their economic objectivesand functions.

Short-Term Commitments or Credits

In the context of export credits, short-term commit-ments are those that provide for repayment within a

266


short period, usually six months (although someexport credit agencies define short-term credits asthose with repayment terms of up to one or twoyears). Short-term business represents the bulk ofthat of most export credit agencies and normallyincludes transactions in raw materials, commodities,and consumer goods.

Short-Term Debt

Debt that has maturity of one year or less. Maturitycan be defined either on an original or remainingbasis. (See also Original Maturity and RemainingMaturity.)

Special Accounts

In the context of the Paris Club, deposits into specialaccounts were first introduced in 1983 for debtorcountries that had a history of running into arrears.After signing the Agreed Minute, the debtor makesmonthly deposits into an earmarked account at thecentral bank of one of the creditor countries. Thedeposit amounts are roughly equal to the morato-rium interest that is expected to fall due on therescheduled debt owed to all Paris Club creditorscombined, and any other payments falling due dur-ing the consolidation period. The debtor then drawson the deposited funds to make payments as soon asthe bilateral agreements with the individual ParisClub creditors are signed and as other payments falldue.

Stand-By Arrangement

An IMF lending facility established in 1952 throughwhich a member country can use IMF financing upto a specified amount to overcome short-term orcyclical balance of payments difficulties. Install-ments are normally phased on a quarterly basis, withtheir release conditional upon the member’s meetingperformance criteria, such as monetary and bud-getary targets. These criteria allow both the memberand the IMF to assess the member’s progress in pol-icy implementation and may signal the need for fur-ther corrective policies. Stand-By Arrangementstypically cover a period of one to two years(although they can extend up to three years). Repay-ments are to be made over a period of 3!/4 to 5 years.The expected repayment period is shortened to 2!/4–4years if the country’s external position allows it torepay earlier.

Stand-By Credit

A commitment to lend up to a specified amount for aspecific period, to be used only in a certain contin-gency.

Standstill

This is an interim agreement between a debtorcountry and its commercial banking creditors thatdefers principal repayments of medium- and long-term debt and rolls over short-term obligations,pending agreement on debt reorganization. Theobjective is to give the debtor continuing access to aminimum amount of trade-related financing whilenegotiations take place and to prevent some banksfrom abruptly withdrawing their facilities at theexpense of others.

Stock Figures

The value of financial assets and liabilities outstand-ing at a particular point in time.

Stock-of-Debt Operation

In the context of the Paris Club, restructuring of theeligible stock of debt outstanding. These restructur-ing operations were granted to Egypt and Poland in1991 and, partially, for Russia and Peru in 1996 andare being implemented for low-income countriesunder Naples, Lyon, and Cologne terms (see Con-cessional Restructuring), provided that certain con-ditions are met: the debtor country has implementedearlier flow rescheduling agreements for at leastthree years and has an appropriate arrangement withthe IMF.

Stress Test

A stress test is a “what if” scenario that takes theworld as given but assumes a major change in oneor more variables in order to see what effect thiswould have on various indicators. For instance, foran economy, the impact on growth, inflation, andexternal debt of a huge change in oil prices could beconsidered. Stress tests are particularly useful forfinancial institutions: for instance, an individualentity might consider the impact on net worth of asharp movement in financial market prices, in orderto help determine the appropriate level of capital tohold.

267


Structural Adjustment Facility (SAF)/Enhanced Structural AdjustmentFacility (ESAF)

The SAF was established by the IMF in 1986 and isno longer operational. The ESAF was established bythe IMF in 1987 and was made a permanent, ratherthan a temporary, facility in September 1996. It wasrenamed the Poverty Reduction and Growth Facilityin November 1999. (See Poverty Reduction andGrowth Facility.)

Subordination Strategy

The policy of Paris Club creditors is that loansextended after the cutoff date are not subject torescheduling; therefore, pre-cutoff date loans areeffectively subordinated to post-cutoff loans. (SeeCutoff Date.)

Supplier’s Credit

A financing arrangement under which an exporterextends credit to the buyer.

T

Technical Cooperation Grants

There are two basic types of technical cooperation:(1) free-standing technical cooperation (FTC), whichis the provision of resources aimed at the transfer oftechnical and managerial skills or of technology forthe purpose of building up general national capacitywithout reference to the implementation of any spe-cific investment projects; and (2) investment-relatedtechnical cooperation (IRTC), which denotes the pro-vision of technical services required for the imple-mentation of specific investment projects.

Terms-of-Reference Rescheduling

Paris Club rescheduling involving only a small num-ber of creditors. Typically this does not require arescheduling meeting between the debtor countryand its creditors, with the agreement being reachedthrough an exchange of letters.

Tied-Aid Loans

Bilateral loans that are linked to purchases of goodsand services by the debtor country from the creditorcountry.

Toronto Terms


Total Official Flows (Gross or Net)

The sum of official development assistance (ODA)and other official flows (OOF). Represents the total(gross or net) disbursements by the official sector ofthe creditor country to the recipient country.

Tranche

A particular portion of a financial claim or liabilitywith its own specific terms as opposed to the generalterms governing the whole claim or liability.

Transfer Clause

A provision that commits the debtor government toguarantee the immediate and unrestricted transfer offoreign exchange in all cases, provided that the pri-vate sector pays the local currency counterpart forservicing its debt.

Transfer Risk

The risk that a borrower will not be able to convertlocal currency into foreign exchange, and so beunable to make debt-service payments in foreigncurrency. The risk normally arises from exchangerestrictions imposed by the government in the bor-rower’s country. This is a particular kind of politicalrisk.

Transfers

Transfers are transactions where there is a transfer ofa real resource or a financial item without a quid proquo.

U

Undisbursed

Funds committed by the creditor but not yet utilizedby the borrower. In BIS terminology, this refers toopen lines of credit that are legally binding on lend-ing banks. A transaction in the balance of paymentsor a position in the international investment position(IIP) is only recorded when an actual disbursementtakes place.

268


Unrecovered Claims

See Claim Payments.

Upper-Middle-Income Countries

In the context of the Paris Club, countries not consid-ered lower-middle-income or low-income countries.These countries receive nonconcessional reschedul-ing terms, originally with flat repayment schedules,but in the 1990s increasingly with graduated paymentschedules that have a maturity of up to 15 years and agrace period of 2–3 years for commercial credits.Official development assistance credits are resched-uled over 10 years, including a grace period of 5–6years. The World Bank classifies as upper-middle-income those countries with GNP per capita incomeof between $2,996 and $9,265 in 2000.

W

World Bank Group

Founded in 1944, the World Bank Group (or WorldBank) consists of five closely associated institutions:

the International Bank for Reconstruction andDevelopment (IBRD), the International Develop-ment Association (IDA), the International FinanceCorporation (IFC), the Multilateral InvestmentGuarantee Agency (MIGA), and the InternationalCentre for Settlement of Investment Disputes(ICSID). The World Bank is the world’s largestsource of development assistance; its main focus ison helping the poorest people and the poorest coun-tries through IDA credits (concessional lending) andon providing IBRD loans to low- and middle-incomecountries for developmental purposes. To achieve itspoverty-reduction mission, the World Bank focuseson investing in people, particularly through basichealth and education; protecting the environment;supporting and encouraging private business devel-opment; and promoting reforms to create a stablemacroeconomic environment and long-term eco-nomic growth.

Write-Off

A financial claim that a creditor regards as unrecov-erable and so no longer carries on its books.

269

1. In the Guide, linkages between external debt sta-tistics, the IIP, and the national accounts have beendeveloped and explained. This appendix goes furtherand explains the relationship between the nationalaccounts and the IIP, such that data on the IIP can beincorporated into the external account componentsof the rest of the world account of the nationalaccounts system, bringing compilation and collec-tion efficiency gains as well as analytical benefits.

2. There is virtually complete concordance betweenthe 1993 SNA and BPM5 with respect to such issuesas the delineation of resident units, valuation oftransactions and of the stock of external assets andliabilities, time of recording of transactions in goodsand services, income flows, current transfers, capitaltransfers, external assets and liabilities, and coverageof the IIP. There are, however, differences in classifi-cation between the rest of the world account andBPM5. These reflect, inter alia, differences in analyt-ical requirements and the need in the 1993 SNA toadopt a uniform classification scheme for all sectorsof the economy. In this appendix, the financialaccount element of the national accounts is exam-ined, followed by a detailed comparison between thefinancial accounts and the IIP.

Financial Accounts

Features of Financial Accounts

3. The key features of financial accounts are that (1)they identify the liabilities that net borrowing institu-tional sectors use to finance their deficits, and thefinancial assets that net lending sectors use to allo-cate their surpluses; (2) they facilitate analysis of theflow of funds between different institutional sectorsof the economy; (3) they place emphasis on stockvariables such as financial assets and debt; and (4)they are developed from detailed information on thevarious institutional sectors and their activities infinancial assets/liabilities.

4. The complete system of financial accounts,including flow of funds accounts,1 has considerableanalytical power. For instance, corporate sector grossdebt-equity ratios can be calculated; related shifts byhouseholds or companies into financial deficit(defined relative to GDP) can be observed; andincreases in income gearing (interest payments as aproportion of income), shifts in the pattern of inter-mediation toward or away from the banking sector(as shown by the total assets of banks relative to non-bank financial institutions), and rapid growth of lend-ing in any individual market to a given sector canbe monitored. Furthermore, information on invest-ment patterns of institutional investors, the balancebetween sources of corporate debt finance in bankingand bond markets (to assess vulnerability to crises indifferent institutions or markets), and the maturity ofdebt (on an original maturity basis) is also available.

Financial Assets

5. Financial accounts deal with stocks of financialassets owned by institutional sectors and transactionsin these assets through financial markets. In the 1993SNA and the European System of Accounts 1995(ESA95),2 financial assets are defined as entities overwhich ownership rights are enforced and from whicheconomic benefits may be derived by their owners byholding them or using them, over a period of time(paragraph 11.16 of the 1993 SNA). In short, financialassets are stores of economic value. Most financialassets differ from other assets in that there are counter-part liabilities on behalf of another institutional unit.

6. The 1993 SNA distinguishes eight types of finan-cial assets:

270

Appendix IV. Relationship Between theNational Accounts and the International InvestmentPosition (IIP)

1Flow of funds accounts provide information on financial transac-tions among institutional sectors (for more details, see paragraphs11.103–11.111 and Table 11.3a of the 1993 SNA).2The ESA95 (Eurostat, 1996) is the system of national accounts usedby member states of the European Union. Unless otherwise stated,the ESA95 treatment is consistent in all aspects with the 1993 SNA.

Appendix IV • Relationship Between the National Accounts and the IIP

• Monetary gold and special drawing rights (SDRs)(AF.1);

• Currency and deposits (AF.2);• Securities other than shares (AF.3);• Loans (AF.4);• Shares and other equity (AF.5);• Insurance technical reserves (AF.6);• Financial derivatives (AF.7); and• Other accounts receivable/payable (AF.8).

Most financial assets are further disaggregated, inparticular according to maturity and market type.Thus, transferable deposits and other deposits (forexample, nontransferable savings deposits) areincluded within currency and deposits, while withinsecurities other than shares, a distinction is madebetween short-term and long-term securities.

Institutional Sectors

7. The 1993 SNA groups the institutional units of anational economy into five mutually exclusive institu-tional sectors: nonfinancial corporations, financialcorporations, general government, households, andnonprofit institutions serving households (NPISH)(Table A4.1). With regard to financial corporations, a

distinction is made between the central bank, otherdepository corporations (other monetary financialinstitutions in the ESA95), other financial institutions(except insurance corporations and pension funds),financial auxiliaries, and insurance corporations andpension funds. The general government is alsodivided in four subsectors: central government, stategovernment, local government, and social securityfunds. In the ESA95 (paragraph 2.49) the central bankand other financial corporations are grouped togetherin the monetary financial institutions (MFIs) sector.Also, the ESA95 divides the rest of the world sectorinto European Union (EU), and nonmember countriesand international organizations.

The Link Between the Accounts

8. Changes in stocks of financial assets and liabilitiesfrom one accounting point to another are the conse-quence of a combination of economic flows. Theseinclude financial transactions, valuation changes, andother changes, such as write-offs and transfers of assets/liabilities resulting from, say, an institutional unitchanging sectors. In the 1993 SNA flows and stocks arecompletely integrated—that is, changes in the stock orbalance sheet positions3 of the institutional units canbe fully explained by recorded flows (Table A4.2).

A Simplified Version of Financial AccountBalance Sheets

9. As mentioned above, the economy consists offive resident sectors—nonfinancial and financialcorporations, general government, households, andNPISH—all of which have relationships with therest of the world sector. Figure A4.1 is a matrix of

271

Table A4.1. Classification by Sector in 1993 SNA

Nonfinancial corporations (S.11)Financial corporations (S.12)• Central bank (S.121)• Other depository corporations (S.122)• Other financial intermediaries (except insurance corporations and

pension funds) (S.123)• Financial auxiliaries (S.124)• Insurance corporations and pension funds (S.125)

General government (S.13)1

• Central government (S.1311)• State government (S.1312)• Local government (S.1313)• Social security funds (S.1314)

Households (S.14)

Nonprofit institutions serving households (S.15)

Rest of the world (S.2)

Note: The abbreviations given in brackets are the sectors as they are num-bered in the 1993 SNA.

1The 1993 SNA also includes an alternative presentation of the general gov-ernment sector.This alternative presentation attributes social security funds tothe level of government at which they operate, leaving three subsectors: Centralgovernment plus social security funds operating at the central government level(S.1321); State government plus social security funds operating at the state gov-ernment level (S.1322); and Local government plus social security funds operat-ing at the local government level (S.1323).

Table A4.2. Link Between the Accounts

Flows (change to financial assets and liabilities)Financial account transactionsOther changes in volume of assets accountRevaluation account

Stocks (stocks of financial assets and liabilities)

3Balance sheets are statements, at a particular point in time, of thevalue of the stock of nonfinancial assets and financial assets andliabilities of an economy, sector, or institutional unit. For an econ-omy, gross assets less gross liabilities, the balancing item for abalance sheet, equals the “net worth” of the economy.


272

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various balance sheets that shows nonfinancial aswell as financial assets and liabilities by sector andinstrument; for example, households hold fixedassets of 1,423 as well as shares and other equity of411. For each financial asset/liability, the rows showtotal holdings and issues by sector, and the matchingof asset and liability positions.4 For each sector, thecolumns show financial assets owned or liabilitiesincurred, and also the net worth of the sector. Theneed for consistency among the rows and columnshelps to minimize errors in the data.

10. The financial accounts in a simplified form canbe derived from the second part of Figure A4.1because financial assets and liabilities are shown forall institutional sectors involved. Net financial assetsmay be derived as the balancing item between finan-cial assets and liabilities.

11. Figure A4.1 may be further simplified to showonly the balance sheets of the total economy and the

rest of the world sector. In Figure A4.2, the net worthof the total economy—its national wealth—equals thesum of a country’s nonfinancial assets (9,922) plus itsnet financial claims on the rest of the world. In thebalance sheet for the total economy, all financialassets and liabilities between residents are netted outin the consolidation to leave only the net financialassets position (positive or negative) on the rest of theworld. For the rest of the world balance sheet, onlyfinancial assets and liabilities are shown.

A More Detailed Version of Financial AccountBalance Sheets

12. Financial accounts may be expanded into threedimensions to track each instrument category, thefinancial claims of each sector on each other sector.By indicating who has lent to whom and with whatinstrument, such a matrix lends considerable ana-lytical power to financial accounts. As with thetwo-dimensional approach described above, the inter-locking row and column constraints of the three-dimensional matrix provide an important check on theconsistency of data. This is because for each sector,each transaction involves at least, and usually, two

273

Figure A4.2. Balance Sheets of the Total Economy and the Rest of the World

Assets Liabilities and Net Worth_______________________________________ ________________________________________Rest of the world Total economy Stocks and balancing items Total economy Rest of the world

16,877 Assets

9,922 AN Nonfinancial assets6,047 AN.1 Produced assets5,544 AN.11 Fixed assets

231 AN.12 Inventories272 AN.13 Valuables

3,875 AN.2 Nonproduced assets3,809 AN.21 Tangible nonproduced assets

66 AN.22 Intangible nonproduced assets

618 6,955 AF Financial assets/liabilities 6,446 357770 AF.1 Monetary gold and SDRs

105 1,482 AF.2 Currency and deposits 1,471 116125 1,263 AF.3 Securities other than shares 1,311 7770 1,384 AF.4 Loans 1,437 17

113 1,296 AF.5 Shares and other equity 1,406 326 370 AF.6 Insurance technical reserves 371 2545 163 AF.7 Financial derivatives 148 60

134 227 AF.8 Other accounts receivable/payable 302 59

B.90 Net worth 10,431 261

Note: Shaded areas indicate cells that are not applicable; codes from the 1993 SNA balance sheets are shown in center column.Data are derived from 1993 SNA, Table 13.1: Balance sheets—a line for financial derivatives has been added to reflect the 1999 revision to the 1993 SNA.

Data differ slightly due to small errors in the 1993 SNA table.

4Total financial assets and liabilities do not match because mone-tary gold and SDRs are financial assets that have no counterpartyliability.


balance sheet changes,5 and similarly for each instru-ment, each transaction involves two balance sheetchanges. For example, the issue of a new debt secu-rity by a nonfinancial corporation that is purchased bya nonresident results in the following entries: the non-financial corporation reports the increase in securitiesother than shares liabilities, and an increase in cur-rency and deposit assets; while the nonresidentreports an increase in securities other than sharesassets, and a reduction in currency and deposits.

13. The full three-dimensional matrix is an impor-tant analytical tool but, because of the cost and/or theconceptual complexity, relatively few countries havefull flow of funds data. Figure A4.3 provides thethree-dimensional financial asset matrix taken fromthe 1993 SNA (Table 13.3a, page 302). As can beseen, across the top of the matrix the columns showthe financial assets owned by the five mutually exclu-sive institutional sectors, with subsector detail for thefinancial corporations sector. The rows show the typeof claim disaggregated by institutional sector. Whilea detailed breakdown of the sector of debtor is shownfor securities other than shares, for loans, and fortrade credit and advances, only a resident/nonresi-dent breakdown is shown for shares and other equityand for currency and deposits. The matrix on finan-cial liabilities in the 1993 SNA (Table 13.3b, page303), not shown here, is similar to the financial assetsmatrix, although the columns show the institutionalsector of debtor and the rows show the institutionalsector of creditor. Using both matrixes, all asset, lia-bility, and counterpart combinations can be found.Compilers can adjust the sectors and instrument clas-sifications in either matrix, in order to reflect nationalconditions and needs of users.

14. Table A4.3 is derived from the matrix in FigureA4.3 but includes only the balance sheet of the restof the world. In comparison to the approach in Fig-ure A4.3, financial assets and liabilities of the rest ofthe world account are shown by counterpart institu-tional sector. Compared with the 1993 SNA, TableA4.3 includes additional counterpart sector informa-tion on the following instruments: currency, transfer-able deposits, other deposits, quoted shares, and

nonquoted shares. In some countries this additionalsectoral information is available.

International Investment Position (IIP)

15. The IIP is described in Chapter 17, and so only abrief summary is provided here. The instrumentclassification required by the BPM5 in respect of theIIP and the financial account of the balance of pay-ments consists of equity instruments (which includeequity securities, equity in unincorporated enter-prises, and reinvested earnings), debt instruments(which include bonds and notes, money marketinstruments, trade credits, use of IMF credit andloans, other loans, currency and deposits, and otheraccounts such as arrears), and financial derivatives.Two other financial assets—monetary gold andSDRs—are identified as part of reserve assets.

16. The institutional sector of the resident creditor,for assets, and that of the resident debtor, for liabili-ties, is of analytical value. Accordingly, for portfolioinvestment, financial derivatives and other invest-ment, the IIP distinguishes four sectors: general gov-ernment, monetary authorities, banks, and other. Fordirect investment, however, the domestic sector is aless significant factor. For this reason, the IIP doesnot classify direct investment by sector. Also,because by definition reserve assets can be owned orcontrolled only by the monetary authorities, no sec-toral classification is required for this item.

17. Classification of balance of payments transac-tions by institutional sector plays a significant role inlinking balance of payments statistics with other sta-tistical systems, such as the system of nationalaccounts, money and banking statistics, and govern-ment finance statistics. While the institutional sectorattribution in the IIP is not the same as in the 1993SNA, because of the differing analytical needs, thereis a significant degree of concordance. This isdescribed in more detail below.

Comparison Summary of the Restof the World Balance Sheet Accountand the IIP

Similarities Between the Rest of the WorldBalance Sheet Account and the IIP

18. As a consequence of an explicit decision bythe drafters of the 1993 SNA and BPM5, there is

274

5An example of the need for more than two entries is the settle-ment of a foreign currency financial derivatives contract underwhich the currency and deposits exchanged do not equal eachother in value, with the difference recorded as a redemption of afinancial derivative contract.


275

Financial Assets________________________________________________________________________________________________________Financial corporations_______________________________________________________

Other depositorycorporations________________

Deposit Other InsuranceNon- General money financial corporations Rest

financial govern- House- Central corpo- inter- Financial and pension of theType of Claim and Debtor Total corporations ment NPISH holds bank rations Other mediaries auxiliaries funds world

1. Monetary gold and SDRs

2. Currency and depositsa. Currency

i. National–Residents–Nonresidents

ii. Foreign–Residents

b. Transferable depositsi. National currency

–Residents–Nonresidents

ii. Foreign currency–Residents–Nonresidents

c. Other depositsi. National currency

–Residents–Nonresidents

ii. Foreign currency–Residents–Nonresidents

3. Securities other than sharesa. Short-term

i. Nonfinancial corporationsii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectorsvi. Rest of the world

b. Long-termi. Nonfinancial corporationsii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectorsvi. Rest of the world

4. Loansa. Short-term

i. Nonfinancial corporationsii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectorsvi. Rest of the world

b. Long-termi. Nonfinancial corporationsii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectorsvi. Rest of the world

Figure A4.3. Detailed Version of Balance Sheet Accounts


considerable homogeneity between the concep-tual framework for the rest of the world balancesheet account and the IIP. The degree of homo-geneity may be demonstrated by comparing theirrespective approaches to the coverage of financialinstruments, and the application of principles suchas residence, market valuation, accrual accounting,and maturity.

Coverage of Financial Instruments

19. The financial instruments recognized as finan-cial assets and liabilities in the 1993 SNA are iden-tical with those recognized in BPM5 and includedin the IIP. However, the presentation of thesefinancial assets and liabilities is not identical inthe two accounts, primarily because for analytical

276

5. Shares and other equitya. Resident enterprises

i. Quotedii. Not quoted

b. Nonresident enterprisesi. Quotedii. Not quoted

6. Insurance technical reserves6.1 Net equity of households in

life insurance reserves and in pension funds

6.2 Prepayments of premiums and reserves against outstanding claims

7. Financial Derivativesi. Nonfinancial corporationsii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectorsvi. Rest of the world

8. Other accounts receivable and payable8.1 Trade credit and advances

a. Nonfinancial corporationsb. Householdsc. Central governmentd. State and local governmentse. Other resident sectorsf. Rest of the world

8.2 Othera. Resident sectorsb. Rest of the world

Memorandum itemsDirect investment

EquityLoansOther

Figure A4.3 (concluded)

Financial Assets________________________________________________________________________________________________________Financial corporations_______________________________________________________

Other depositorycorporations________________

Deposit Other InsuranceNon- General money financial corporations Rest

financial govern- House- Central corpo- inter- Financial and pension of theType of Claim and Debtor Total corporations ment NPISH holds bank rations Other mediaries auxiliaries funds world


purposes the IIP groups financial instruments intofunctional categories. This makes reconciliationbetween the two accounts difficult. Table A4.4provides a concordance between the eight cate-gories of financial instruments in the 1993 SNA

and their attribution in the IIP. The extent to whichinstruments are separately identified in the twoaccounts varies, as is evident from the table.However, the balance of payments transactiondata provide a greater degree of detail than the

277

Table A4.3. Rest of the World Balance Sheet by Counterpart Sector

Financial Assets of Rest of World Liabilities of Rest of World

2. Currency and deposits 2. Currency and depositsa. Currency a. Currency

i. National i. National currencyii. Foreign i. Nonfinancial corporations

b. Transferable deposits ii. Financial corporationsi. National currency iii. Central governmentii. Foreign currency iv. State and local governments

c. Other deposits v. Other resident sectorsi. National currency ii. Foreign currencyii. Foreign currency i. Nonfinancial corporations

ii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectors

b. Transferable depositsi. National currency

i. Nonfinancial corporationsii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectors

ii. Foreign currencyi. Nonfinancial corporationsii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectors

c. Other depositsi. National currency

i. Nonfinancial corporationsii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectors

ii. Foreign currencyi. Nonfinancial corporationsii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectors

3. Securities other than shares 3. Securities other than sharesa. Short-term a. Short-term

i. Nonfinancial corporations i. Nonfinancial corporationsii. Financial corporations ii. Financial corporationsiii. Central government iii. Central governmentiv. State and local governments iv. State and local governmentsv. Other resident sectors v. Other resident sectors

b. Long-term b. Long-termi. Nonfinancial corporations i. Nonfinancial corporationsii. Financial corporations ii. Financial corporationsiii. Central government iii. Central governmentiv. State and local governments iv. State and local governmentsv. Other resident sectors v. Other resident sectors


IIP and so greater subdetail concordance with the1993 SNA flow accounts than there is between thestock measures. (See Table A4.5 of this appendix.The detailed presentation of balance of pay-ments transactions is provided on pages 132–40 ofBPM5.)

Monetary gold and SDRs

20. The 1993 SNA does not separately identify mon-etary gold from SDRs (see Table A4.4), unlike theIIP, which separately identifies these financial assetswithin reserve assets. Gold is a component of

278

4. Loans 4. Loansa. Short-term a. Short-term

i. Nonfinancial corporations i. Nonfinancial corporationsii. Financial corporations ii. Financial corporationsiii. Central government iii. Central governmentiv. State and local governments iv. State and local governmentsv. Other resident sectors v. Other resident sectors

b. Long-term b. Long-termi. Nonfinancial corporations i. Nonfinancial corporationsii. Financial corporations ii. Financial corporationsiii. Central government iii. Central governmentiv. State and local governments iv. State and local governmentsv. Other resident sectors v. Other resident sectors

5. Shares and other equity 5. Shares and other equitya. Resident enterprises i. Quoted

i. Quoted i. Nonfinancial corporationsii. Not quoted ii. Financial corporations

iii. Central governmentiv. State and local governmentsv. Other resident sectors

ii. Not quotedi. Nonfinancial corporationsii. Financial corporationsiii. Central governmentiv. State and local governmentsv. Other resident sectors

6. Insurance technical reserves 6. Insurance technical reserves6.1 Net equity of nonresident households in life insurance 6.1 Net equity of resident households in life insurance

reserves and in pension funds reserves and in pension funds6.2 Prepayments of premiums and reserves against outstanding 6.2 Prepayments of premiums and reserves against

claims outstanding claims

7. Financial derivatives 7. Financial derivativesi. Nonfinancial corporations i. Nonfinancial corporationsii. Households ii. Householdsiii. Central government iii. Central governmentiv. State and local governments iv. State and local governmentsv. Other resident sectors v. Other resident sectors

8. Other accounts receivable 8. Other accounts payable8.1 Trade credit and advances 8.1 Trade credit and advances

a. Nonfinancial corporations a. Nonfinancial corporationsb. Households b. Householdsc. Central government c. Central governmentd. State and local governments d. State and local governmentse. Other resident sectors e. Other resident sectors

8.2 Other 8.2 Othera. Resident sectors a. Nonresident sectors

Table A4.3 (concluded)

Financial Assets of Rest of World Liabilities of Rest of World


279

Table A4.4. Comparison of Breakdowns by Financial Instrument

1993 SNA BPM5 Classification of 1993 SNA Classification of Financial Instruments Code Financial Instruments IIP Code1

Monetary gold and special drawing rights AF.1Monetary gold 5.1 (RA)Special drawing rights (SDRs) 5.2 (RA)

Currency and deposits AF.2 Currency and deposits 4.3 (OI)Currency AF.21 5.4.1 (RA, foreign exchange)Transferable deposits AF.22 5.3. (RA, RPF)Other deposits AF.29 5.5 (part of RA, other claims)

Securities other than shares AF.3 Debt securities 1.2 (part of DI, other capital)Securities other than shares Money market instruments 2.2.1 (PI, debt securities)

Short-term AF.31 Bonds and notes 2.2.2 (PI, debt securities)Long-term AF.32 5.4.2.2 (RA, foreign exch.)

5.4.2.3 (RA, foreign exch.)5.5 (part of RA, other claims)

Loans AF.4 Loans 4.2.1.2 (OI)Short-term AF.41 Short-term loans 4.2.2.2 (OI)Long-term AF.42 4.2.3.2 (OI)

4.2.4.2 (OI)Long-term loans 4.2.1.1 (OI)

4.2.2.1 (OI4.2.3.1 (OI)4.2.4.1 (OI)5.3 (part of RA, RPF)

Shares and other equity AF.5Reinvested earnings 1.1 (part of DI)Equity capital 1.1 (part of DI)Equity securities 2.1 (PI)Equities 5.4.2.1 (RA, for. exchange)

5.5 (part of RA, other claims)

Insurance technical reserves AF.6 4.4.1.1 (part of OI, other Net equity of households in life insurance reserves and AF.61 Net equity of households in life assets/liabilities, long term)

in pension funds reserves insurance reserves and in 4.4.2.1 (part of OI, other Net equity of households in life insurance reserves AF.611 pension funds assets/liabilities, long term)Net equity of households in pension funds reserves AF.612 Prepayments of premiums and 4.4.3.1 (part of OI, other

Prepayments of insurance premiums and reserves for F.62 reserves against outstanding assets/liabilities, long term)outstanding claims claims 4.4.4.1(part of OI, other

assets/liabilities, long term)

Financial derivatives AF.7 Financial derivatives 3 (FD)5.4.3 (RA)

Other accounts receivable/payable AF.8Trade credits and advances AF.81 Other claims on affiliated 1.2 (part of DI other capital)Other AF.89 enterprises/other liabilities

to affiliated enterprisesOther claims on direct investors/ 1.2 (part of DI other capital)

other liabilities to direct investors

Trade credits (short- and 4.1 (OI)long-term)

Other 4.4 (part of OI, other Short-term assets/liabilities)Long-term

Memorandum itemDirect investment AF.m

Note: DI, direct investment; PI, portfolio investment; FD, financial derivatives; OI, other investment; RA, reserve assets; RPF, reserve position in the Fund.1In the 1999 revision to the IIP, the financial derivatives functional category is included between the portfolio and other investment functional categories.

This affects the numbering of other investment and reserve assets as compared with the published BPM5.


reserve assets if owned by the authorities (or by oth-ers who are subject to the effective control of theauthorities) and held as a reserve asset. SDRs areinternational reserve assets created by the IMF tosupplement other reserve assets. In the rest of theworld balance sheet, monetary gold and SDRs arenot regarded as liabilities of the rest of the world sec-tor, although they are regarded as external assets ofthe domestic economy.

Currency and deposits

21. In the 1993 SNA category, the currency anddeposits category is subcategorized into currency,transferable deposits, and other deposits (see TableA4.4). Such a subcategorization is not provided inthe IIP. However, for all sectors except the monetaryauthorities, for whom currency and deposit data arein reserve assets, the 1993 SNA category may bederived from 4.3 in other investment.

Securities other than shares

22. The 1993 SNA subcategorizes securities otherthan shares into short- and long-term (see TableA4.4). The same principle applies to the subcatego-rization in the IIP, although the subcategories are enti-tled money market instruments, and bonds and notes.However, the IIP allocates securities other than sharesto direct investment and reserve assets if they meet thecriteria to be included in those functional categories.For direct investment, a breakdown of securities otherthan shares by subcategories is not available.

Loans

23. In both accounts, data on loans are subcatego-rized into short- and long-term on the basis of origi-nal maturity (see Table A4.4). Within reserve assets,loans to the IMF are included.

Shares and other equity

24. The 1993 SNA does not subcategorize shares andother equity, while the IIP provides information onreinvested earnings, equity capital, equity securities,and equities (see Table A4.4). As elsewhere, the IIPattribution is primarily on a functional category basis,so if shares and other equity meet the definition ofdirect investment or reserve assets they are includedin these functional categories. Otherwise these instru-ments are included in portfolio investment.

Insurance technical reserves

25. In the 1993 SNA the insurance technicalreserves category is subcategorized into net equity ofhouseholds in life insurance reserves and in pensionfunds and prepayments of insurance premiums andreserves for outstanding claims (see Table A4.4).There is no subcategorization included in the IIP,and indeed the whole category is indistinguishablyincluded in the other assets, other investment cate-gory in the IIP. The different approach in the twoaccounts reflects the relative analytical importanceof this category to the domestic sectors comparedwith the rest of the world sector: much insurance andpension fund activity is within an economy.

Financial derivatives

26. Following the 1999 revisions, both the 1993SNA and the IIP show separate categories for finan-cial derivatives (see Table A4.4). However, the IIPalso allocates financial derivatives to reserve assetsif they meet the criteria to be included in this func-tional category.

Other accounts receivable/payable

27. In the 1993 SNA, the category other accountsreceivable or payable has two subcategories—tradecredits and advances and other (see Table A4.4). Inthe IIP, trade credit is separately identified withinother investment, with a breakdown between short-and long-term trade credits, on an original maturitybasis. The other subcategory from the 1993 SNA isincluded within the other assets subcategory of otherinvestment, which has a breakdown between short-and long-term. Trade credit and other assets that meetthe criteria are included within direct investment.

Core Principles

28. The core principles of the 1993 SNA, the IIP,and this Guide are the same. The concepts of resi-dence and valuation are identical. A resident is aninstitutional unit that has its center of economicinterest in the economic territory of a country, whilevaluation of the position data is to be at prices cur-rent on the day to which the balance sheet refers—that is, the market price.6 Both the 1993 SNA and

280

6The Guide also defines nominal value (Chapter 2) and regardsthis method of valuation as central to debt analysis.


BPM5 provide specific as well as general guidanceon valuation.7

29. The 1993 SNA and IIP, as well as this Guide,follow the principle of accrual accounting in thattransactions are recorded when economic value iscreated, transformed, exchanged, transferred, orextinguished. Claims and liabilities are deemed toarise when there is a change in ownership (that is,when both the creditor and debtor enter the claimand liability, respectively, on their books). By con-trast, under the cash basis of recording, transactionsare recorded only when payment is made orreceived. Under the due-for-payment basis ofrecording, a variation of the cash basis, transactionsare recorded when receipts or payments arising fromthe transactions fall due.

30. The 1993 SNA and BPM5 recommend the samemethod for converting positions denominated inforeign currencies into the national currency or asingle foreign currency, such as U.S. dollars: the useof the market exchange rates prevailing on the dateto which the balance sheet relates—the midpointbetween buying and selling spot rates—is recom-mended. The maturity concept used in both the1993 SNA and for the IIP is that of original maturitybreakdown, albeit as a secondary classification crite-rion. Short-term financial assets are usually definedas those with an original maturity of one year or less,and in exceptional cases two years at maximum.Long-term financial assets are defined as having anoriginal maturity of normally more than one yearand in exceptional cases more than two years atmaximum.

Discrepancies Between the Rest of the WorldBalance Sheet Account and the IIP

31. The main discrepancies between the rest of theworld balance sheet in the 1993 SNA and the IIP arein presentation, reflecting different analytical needs.As mentioned above, the IIP gives primacy in pre-sentation to functional categories—such as directinvestment—whereas the 1993 SNA gives primacy to

instrument and sector. In addition, the 1993 SNA rec-ommends the presentation of a broader range ofinstitutional sectors than is recommended by BPM5for the IIP. Whereas the IIP presents data for up tofour institutional sectors—monetary authorities,general government, banks, and other—the 1993SNA recommends that data be presented for fiveinstitutional sectors in the economy. In addition, the1993 SNA recommends the collection of subsectordetail, unlike BPM5. The broad reconciliationbetween the 1993 SNA and BPM5 institutional sec-tors is presented in Figure A4.4.

32. As shown in the figure, two subsectors of finan-cial corporations (central bank (S.121) and otherdepository corporations (S.122)) are related to theBPM5 sectors monetary authorities and banks. How-ever, the monetary authorities sector in the IIPincludes not only the central bank but also the opera-tions of other government institutions or commercialbanks when these operations are usually attributed tothe central bank. As a consequence, the delimitationof the sector general government in the IIP is not nec-essarily identical to the 1993 SNA definition, whichrecommends a further breakdown into the subsectorscentral, state, and local government, and social secu-rity funds.8 The other sector in the IIP comprises non-

281

Figure A4.4. Sectoral Breakdown in 1993 SNAand in IIP

1993 SNA IIP

Nonfinancial corporations (S.11) Other sectors

Central bank (S.121) Monetary authorities

Other depository corporations (S.122) Banks

Other financial intermediaries (except insurance Other sectorscorporations and pension funds) (S.123)

Financial auxiliaries (S.124)Insurance corporations and pension funds (S.125)

General government (S.13) General government• Central government (S.1311)• State government (S.1312)• Local government (S.1313)• Social security funds (S.1314)

Households (including noncorporations) (S.14) Other sectors

Nonprofit institutions serving households (S.15) Other sectors

7For instance, see paragraphs 14.48–14.52 of the 1993 SNA.Chapter V of BPM5 notes the need to apply market price proxiesor equivalents in situations in which a market price in its literalsense cannot be determined (for example, the possible case oftransfer pricing that significantly distorts measurement in resourcetransfers between affiliated enterprises).

8Although, as noted above, the 1993 SNA also recommends an alter-native presentation of the subcategories of general government.


282

Table A4.5. Correspondence of 1993 SNA Tables with BPM5 and IIP Components:1Account V—Rest of the World Account, V.III—External Accumulation Accounts

V.III.1: Capital Account

Correspondence to balance of payments standard 1993 SNA categories components [items], additional details and aggregates

Changes in assets Transactions in liabilitiesK.2 Acquisitions less disposals of nonproduced Item 2.A.2 acquisition/disposal of nonproduced nonfinancial assets

nonfinancial assets Sum of itemsB.9 Net lending (+)/net borrowing (–) 1. Current account balance; and

2.A. Capital account balance

Changes in liabilities and net worth Transactions in assetsB.12 Current external balance Item 1. Current accountD.9 Capital transfers receivable Item 2.A.1 Capital transfersD.9 Capital transfers payable Item 2.A.1 Capital transfersB.10.1 Changes in net worth due to saving and Sum of items

net capital transfers 1. Current account balance; and2.A.1 Net capital transfers

V.III.2: Financial Account2

Changes in assets Transactions in liabilitiesF.1 Monetary gold and SDRs Sum of items

2.B.5.1 monetary gold; and2.B.5.2 special drawing rights (with sign reversed3)

F.2 Currency and deposits Item2.B.4.2.3 currency and deposits

F.3 Securities other than shares Sum of items2.B.1.1.3.2.1 debt securities issued by direct investor;2.B.1.2.3.2.1 debt securities issued by affiliated enterprises;2.B.2.2.2 debt securities (part of portfolio investment)

F.4 Loans Item2.B.4.2.2 loans

F.5 Shares and other equity Sum of items2.B.1.1.1.2 equity capital: liabilities to affiliated enterprises

(part of direct investment abroad);2.B.1.2.1.2 equity capital: liabilities to direct investors

(part of direct investment in the reporting economy);2.B.1.2.2 reinvested earnings (part of direct investment in the reporting

economy); and2.B.2.2.1 equity securities (part of portfolio investment)

F.6 Insurance technical reserves Sum of items2.B.4.2.4.4.1.1 net equity of households in life insurance reserves and in pension

funds; and2.B.4.2.4.1.1.2 prepayments of premiums and reserves against outstanding claims

F.7 Financial derivatives 2.B.3.2 liabilities (financial derivatives)F.8 Other accounts receivable Sum of items

2.B.1.1.3.2.2 other liabilities of direct investors (part of direct investment abroad);2.B.1.2.3.2.2 other liabilities to direct investors

(part of direct investment in the reporting economy);2.B.4.2.1 trade credits (part of other investment);2.B.4.2.4 other liabilities;Minus items2.B.4.2.4.4.1.1 net equity of households in life insurance reserves and in pension

funds; and2.B.4.2.4.4.1.2 prepayments of premiums and reserves against outstanding claims

(all part of other investment)


283

Changes in liabilities and net worth Transactions in assets

F.2 Currency and deposits Sum of items2.B.4.1.3 currency and deposits (part of other investment);2.B.5.3.1 deposits (part of reserve position in the Fund);2.B.5.4.1 currency and deposits (part of foreign exchange); and2.B.5.5.1 currency and deposits (part of other reserve claims)

F.3 Securities other than shares Sum of items2.B.1.1.3.1.1 debt securities issued by affiliated enterprises

(part of direct investment abroad);2.B.1.2.3.1.1 debt securities issued by direct investors

(part of direct investment in the reporting economy);2.B.2.1.2 debt securities (part of portfolio investment);2.B.5.4.2.2 bonds and notes (part of foreign exchange);2.B.5.4.2.3 money market instruments and financial derivatives

(part of foreign exchange); and2.B.5.5.2.2 debt securities (part of other reserve claims)

F.4 Loans Sum of items2.B.4.1.2 loans (part of other investment); and2.B.5.3.2 loans (part of reserve position in the Fund)

F.5 Shares and other equity Sum of items2.B.1.1.1.1 equity capital: claims on affiliated enterprises

(part of direct investment abroad);2.B.1.1.2 reinvested earnings (part of direct investment abroad);2.B.1.2.1.1 equity capital: claims on direct investors

(part of direct investment in the reporting economy);2.B.2.1.1 equity securities (part of portfolio investment); and2.B.5.4.2.1 and 2.B.5.5.2.1 equities

(part of reserve assets, foreign exchange, and other claims)

F.6 Insurance technical reserves Sum of items2.B.4.1.4.4.1.1 net equity of households in life insurance reserves and in pension

funds;2.B.4.1.4.1.1.1; 2.B.4.1.4.2.1.1; 2.B.4.1.4.3.1.1; and2.B.4.1.4.4.1.2 prepayments of premiums and reserves against outstanding claims


F.7 Financial derivatives Sum of items 2.B.3.1 assets (financial derivatives), and 2.B.5.4.3 financial derivatives (part of foreign exchange)

F.8 Other accounts payable Sum of items2.B.1.1.3.1.2 other claims on affiliated enterprises (part of direct investment abroad);2.B.1.2.3.1.2 other claims on direct investors

(part of direct investment in the reporting economy);2.B.4.1.1 trade credits (part of other investment);2.B.4.1.4 other assets;

Minus tems2.B.4.1.4.4.1.1 net equity of households in life insurance reserves and in pension

funds;2.B.4.1.4.1.1.1; 2.B.4.1.4.2.1.1; 2.B.4.1.4.3.1.1; and2.B.4.1.4.4.1.2 prepayments of premiums and reserves against outstanding claims


B.9 Net lending (+)/net borrowing (–)

Table A4.5 (continued)

V.III.2: Financial Account (continued)



financial corporations (S.11), some subsectors offinancial corporations such as other financial interme-diaries (S.123), financial auxiliaries (S.124), as wellas insurance corporations and pension funds (S.125),households (S.14), and NPISH (S.15).

Detailed Examination of theClassification Linkages Among the Restof the World Account, the Balance of Payments Accounts, and the IIP

33. Although harmonization in concepts has beenattained between both systems, differences in pre-sentation reflect differences in analytical require-

ments, the relative quantitative significance of someitems in international transactions, and constraintsimposed by the internal structures of the respectiveaccounts. Nonetheless, bridges can be constructed toderive relevant national accounting flows and stocksfrom balance of payments accounts and the interna-tional investment position.

34. In terms of transactions, the 1993 SNA distin-guishes the following accounts in respect of the restof the world account of goods and services:• Account V.I: External account of goods and ser-

vices (page 316 of the 1993 SNA);• Account V.II: External account of primary

incomes and current transfers (page 316);

284

V.III.3: Other Changes in Assets Accounts,V.III.3.1: Other Changes in Volume of Assets Account


Changes in assets Changes in liabilitiesK.7 Catastrophic losses Catastrophic losses (part of other adjustments)K.8 Uncompensated seizures Uncompensated seizures (part of other adjustments)K.10 Other volume changes in financial assets and Other volume changes (part of other adjustments)

liabilities, n.e.c.K.12 Changes in classifications and structure Change in classifications and structure (part of other adjustments)

Changes in liabilities and net worth Changes in assetsK.7 Catastrophic losses Catastrophic losses (part of other adjustments)K.8 Uncompensated seizures Uncompensated seizures (part of other adjustments) K.10 Other volume changes in financial assets and

liabilities, n.e.c. Other volume changes (part of other adjustments)K.12 Changes in classifications and structure Change in classifications and structure (part of other adjustments)B.10.2 Changes in net worth due to other changes

in volume of assets

Changes in assets Changes in liabilitiesK.11 Nominal holding gains/losses in financial assets Sum of entries in the columns for price and exchange rate changesK.11.1 Neutral holding gains/losses in financial assets Sum of entries in the columns for neutral holding gains/lossesK.11.2 Real holding gains/losses in financial assets Sum of entries in the columns for real holding gains/losses

Changes in liabilities and net worth Changes in assetsK.11 Nominal holding gains/losses in liabilities Sum of entries in the columns for price and exchange rate changesK.11.1 Neutral holding gains/losses in liabilities Sum of entries in the columns for neutral holding gains/lossesK.11.2 Real holding gains/losses in liabilities Sum of entries in the columns for real holding gains/lossesB.10.3 Changes in net worth due to nominal holding Price and exchange rate changes in assets less price and exchange

gains/losses rate changes in liabilitiesB.10.31 Changes in net worth due to neutral holding Neutral holding gains/losses in assets less neutral holding gains/losses

gains/losses in liabilitiesB.10.32 Changes in net worth due to real holding Real holding gains/losses in assets less real holding gains/losses in liabilities

gains/losses

1The assets of the rest of the world sector in the 1993 SNA correspond with the liabilities in the balance of payments and the IIP, and vice versa.2The detailed presentation of balance of payments transactions that is used for this comparison with the 1993 SNA financial instrument categories is pro-

vided on pp. 132–40 of BPM5. Due to the introduction of financial derivatives as a separate category in the 1993 SNA and a separate functional category inBPM5, some series have been renumbered since the publication of these manuals.

3The domestic sector has a “claim” on the rest of the world sector.

Table A4.5 (concluded)


• Account V.III.1: Capital account (page 316) andV.III.2: Financial account (page 317), which arecomponents of V.III: External accumulationaccounts (page 316).

In BPM5, the transactions reflected in Accounts V.Iand V.II are those in the current account componentof the balance of payments accounts, while thosereflected in Account V.III.1 are contained in thecapital account component of the capital and finan-

cial account of the balance of payments. The flowsreflected in V.III.2 are shown in the financialaccount component of the capital and financialaccount. Account V.III.3.1: Other changes involume of assets (page 317) and Account V.III.3.2:Revaluation account (page 317) are included withinthe IIP statement in BPM5, in order to reconcilethe transactions between reporting dates with thechange in positions. Thus, Account V.III.3.1 corre-sponds to the column for “other adjustments” in

285

Table A4.6. Correspondence of 1993 SNATables with BPM5 and IIP Components:Account V—Rest of the World Account, V.IV—External Assets and Liabilities Account

V.IV.1: Opening Balance Sheet

Correspondence to international investment position standard 1993 SNA categories components and additional details

AF Financial assets Sum of itemsB.1.1.2 liabilities (equity capital and reinvested earnings) to direct investors

(part of direct investment in the reporting economy);B.1.2.2 liabilities (other capital) to direct investors (part of direct investment in the

reporting economy);A.1.1.2 liabilities (equity capital and reinvested earnings) to affiliated enterprises

(part of direct investment abroad);A.1.2.2 liabilities (other capital) to affiliated enterprises (part of direct investment abroad);B.2 portfolio investment; andB.3 financial derivatives; andB.4 other investment.

AF Liabilities Sum of itemsA.1.1.1 claims (equity capital and reinvested earnings) on affiliated enterprises

(part of direct investment abroad);A.1.2.1 claims (other capital) on affiliated enterprises (part of direct investment abroad);B.1.1.1 claims (equity capital and reinvested earnings) (part of direct investment in the

reporting economy);B.1.2.1 claims (other capital) on direct investors (part of direct investment in the

reporting economy);A.2 portfolio investment;A.3 financial derivatives; andA.4 other investment; andA.5 reserve assets.1

B.90 Net worth

V.IV.2: Changes in Balance Sheet

AF Total changes in financial assets Sum of transactions, price and exchange rate changes, and other adjustments in respect of the corresponding international investment position items identified in account V.IV.1.

AF Total changes in liabilities Sum of transactions, price and exchange rate changes, and other adjustments in respect of the corresponding international investment position items identified in account V.IV.1.

B.10 Changes in net worth, total Total changes in assets – total changes in liabilities.

V.IV.3: Closing Balance Sheet

AF Financial assets Sum of end of period values of corresponding items in the international investment position and identified in Account V.IV.1.

AF Liabilities Sum of end of period values of corresponding items in the international investment position and identified in Account V.IV.1.

B.90 Net worth

1Monetary gold and SDRs are components of reserve assets that have no counterpart liability in the rest of the world sector of the national accounts.


the IIP statement, while Account V.III.3.2 corre-sponds to the columns for “price changes” and“exchange rate changes” in the IIP statement.Account V.IV: External assets and liabilities account(page 318) is equivalent to the IIP statement inBPM5.

35. Tables A4.5 and A4.6 (on preceeding page) pro-vide reconciliation between the categories shown inthe relevant capital and financial accounts for theexternal sector of the 1993 SNA and correspondingitems in balance of payments accounts and the IIP.The major elements of the 1993 SNA capitalaccount of the external accumulation accounts(Table A4.5, Account V.III.1) are identical with thecapital account component of the capital and finan-cial account of the balance of payments. Althoughthe balancing item, net lending/net borrowing, inthe capital account of the 1993 SNA is not explicitlyidentified in the balance of payments, it nonethelesscan be derived by adding the current account bal-ance and the balance of transactions reflected in thecapital account of BPM5.

36. Coverage of the 1993 SNA financial account(Table A4.5, Account V.III.2) is identical with thecoverage of the financial account of the capital andfinancial account in the balance of payments,although the level of detail is different. As notedabove, in the 1993 SNA the primary focus is onfinancial instruments, whereas in the balance of pay-ments the primary focus is on functional categoriza-tion (that is, direct investment, portfolio investment,financial derivatives, other investment, and reserveassets). In addition to identifying types of financialinstruments (insurance technical reserves being anexception), the balance of payments includes anabbreviated sector breakdown (that is, monetaryauthorities, general government, banks, and other).Furthermore, to conform with the 1993 SNA, BPM5states that entries in the credit and debit sides of thefinancial account of the balance of payments arerecorded, in principle, on a net basis (that is,increases less decreases in assets or liabilities).However, gross recording is recommended as sup-plementary information, such as in the case of draw-ings and repayments on long-term loans.

286

1. The Heavily Indebted Poor Countries (HIPC) Ini-tiative is a major initiative of consequence to themonitoring of external debt position. The objectiveof this Initiative is to reduce external debt positionsof some low-income countries to sustainable lev-els—that is, to levels that enable them to meet theircurrent and future external debt-service obligationsin full, without recourse to debt rescheduling oraccumulation of arrears, and without compromisinggrowth. Among other things, this requires accuratemeasurement of the external debt position. In thisappendix, the HIPC Initiative is described, alongwith Debt Sustainability Analysis (DSA), a buildingblock of the HIPC Initiative.

HIPC Initiative

Origin and Description of the HIPC Initiative

2. For a number of low-income countries, it wasrecognized in the second half of the 1990s, by offi-cial creditors in particular, that the external debt situ-ation was becoming extremely difficult. For suchcountries, even full use of traditional mechanisms ofrescheduling and debt reduction—together with con-tinued provision of concessional financing and pur-suit of sound economic policies—would not besufficient to attain sustainable external debt levelswithin a reasonable period of time and without addi-tional external support. The HIPC Initiative is acomprehensive, integrated, and coordinated frame-work developed jointly by the IMF and the WorldBank to address these external debt problems of theHIPCs. The framework was adopted in September1996, through its endorsement by the Interim andDevelopment Committees of the IMF and WorldBank. Following a comprehensive review launchedin early 1999, the Initiative was enhanced in Sep-tember 1999 to provide faster, deeper, and broaderdebt relief, and to strengthen the links between debtrelief, poverty reduction, and social policies.

3. The Initiative is designed to enable HIPCs thathave a strong track record of economic adjustmentand reform to achieve a sustainable debt positionover the medium term. Central to the Initiative arethe country’s continued efforts toward macroeco-nomic and structural adjustment and social reforms,with an emphasis on poverty reduction. Thus, allcountries requesting HIPC Initiative assistance must(1) have adopted a Poverty Reduction Strategy Paper(PRSP) through a broad-based participatory process,by the decision point (see below), and (2) have madeprogress in implementing this strategy for at leastone year by the completion point (see below).1

These efforts are complemented by a commitmentfrom the international financial community to tacklethe country’s external debt problem in a comprehen-sive and coordinated fashion. Indeed, the Initiativerequires the participation of all creditors—bilateral,multilateral, and commercial.

Eligibility Criteria and the Structure of the HIPC Initiative

4. To receive assistance under the HIPC Initiative,countries need to be both eligible and face unsus-tainable external debt positions. To be eligible, acountry needs to have satisfied a set of criteria.Specifically, it must:• Be eligible for concessional assistance from the

IMF and World Bank;• Face an unsustainable debt burden, beyond exist-

ing, traditional debt-relief mechanisms;2 and

Appendix V. Heavily Indebted Poor Countries(HIPC) Initiative and DebtSustainability Analysis

287

1On a transitional basis, given the time country authorities needto prepare a participatory PRSP, countries can reach their deci-sion points based on an interim PRSP (I-PRSP), which sets outthe government’s commitment to and plans for developing aPRSP.

2Such as a Paris Club stock-of-debt operation on a Naples terms67 percent present value reduction with at least comparable actionfrom bilateral creditors. Table 8.2 in Chapter 8 sets out the evolu-tion of Paris Club rescheduling terms.


• Establish a track record of reform and sound poli-cies through IMF- and World Bank-supportedprograms.

5. The sustainability of the external debt position isdetermined by comparing the outcome of a compre-hensive loan-by-loan DSA, agreed both with theauthorities and creditors, with the HIPC targets. Atthe time of writing, these targets are set at 150 per-cent for the present value of the ratio of debt toexports, and 15 percent for the ratio of debt serviceto exports. For very open economies (with anexports-to-GDP ratio of at least 30 percent) that havea heavy fiscal burden of debt despite strong efforts togenerate revenue (indicated by a ratio of fiscal rev-enue to GDP of at least 15 percent), the presentvalue of debt-to-exports target can be lower than 150percent and is set so as to achieve a 250 percent ratioof the present value of debt to fiscal revenue at thedecision point.3

6. The IMF and World Bank Executive Boardsdetermine need, and commit assistance, at the deci-sion point. Those institutions and some other credi-tors also start delivering part of their assistancebetween the decision and completion points (interimrelief).4 Assistance is provided, irrevocably by allcreditors, at (or before) the completion point—sub-ject, as mentioned above, to the country implement-ing a set of key, predefined structural reforms.5 Thus,there is an incentive for countries to implementreforms quickly, and so develop ownership over thetimetable. Figure A5.1 sets out the process in dia-grammatical form.

Calculations of Overall Assistance

7. Assistance under the HIPC Initiative is defined asthe present value reduction required to lower externaldebt at the decision point to the Initiative’s targets.

Total assistance is defined as assistance at the com-pletion point plus the action provided during theinterim period. The external debt position calculationunder the HIPC Initiative (or net present value, NPV,calculation of external debt as it is described in HIPCterminology)6 is the sum of all future debt-serviceobligations (interest and principal) on existing debton a loan-by-loan basis, discounted at the marketinterest rate (the Commercial Interest Reference Rate,CIRR, from the OECD). So for concessional lending,the calculation results in a present value of debt lessthan its nominal value, because the interest rate on theloan is less than the market rate. The calculation ofthe external debt position at the decision point usesthe latest actual end-of-period data available, mea-sured after assuming a hypothetical Paris Club stock-of-debt operation on Naples terms (67 percentreduction on eligible debt) and comparable treatmenton other official bilateral and commercial claims.

Burden-Sharing Among Creditorsand Delivery of Assistance

8. One of the Initiative’s guiding principles is broadand equitable participation of all creditors (multilat-eral, official bilateral, and commercial) in providingassistance sufficient for the country to achieve debtsustainability. For the Paris Club, this generallyinvolves a stock-of-debt operation with a reductionof up to 90 percent in the present value of eligibleclaims. The country is required to seek at least com-parable treatment from its other official bilateral andcommercial creditors.

9. Multilateral creditors take action proportional tobilateral creditors to reduce the present value of theirclaims on the country. Each multilateral institutionchooses the vehicle to deliver its share of assistance(derived in proportion to its share in the presentvalue of multilateral claims at the decision point).The IMF’s contribution is made in the form of grantsfinanced from Poverty Reduction and Growth Facil-ity (PRGF) resources7 and is used only to meet debt-

288

3The export denominator is derived as the “backward-looking”three-year average of exports of goods and services (BPM5 defini-tion) over the latest actual data that will be available at the deci-sion point. The fiscal revenue denominator, if used, is the latestactual end-of-period figure, and is defined as central governmentrevenue (excluding grants).

4Bilateral and commercial creditors are generally expected toreschedule obligations coming due. There are limits to the maxi-mum assistance that the IMF and World Bank can provide duringthe interim period.

5A number of key elements or triggers are identified that wouldadequately represent overall progress in macroeconomic, struc-tural, and social areas, and that would eventually translate intodurable growth, debt sustainability, and poverty reduction.

6While the term NPV is commonly used, frequently it would bemore accurate to describe the calculation as present value—discounting future interest and principal payments by an interestrate—and this is the approach taken in the Guide.

7The PRGF is available to those countries that are facing pro-tracted balance of payments problems and are eligible to borrowon concessional terms under the International Development Asso-ciation (IDA). Previous to November 1999, the PRGF was knownas the Enhanced Structural Adjustment Facility (ESAF).

Appendix V • HIPC Initiative and Debt Sustainability Analysis

289

Figure A5.1. Enhanced HIPC Initiative Flow Chart

• Country establishes three-year track record of good performance and develops together with civil society a Poverty Reduc-tion Strategy Paper (PRSP); in early cases, an Interim PRSP may be sufficient to reach the decision point.

• Paris Club provides flow rescheduling on Naples terms, i.e., rescheduling of debt service on eligible debt falling due (up to 67percent reduction on a net present value (NPV) basis).

• Other bilateral and commercial creditors provide at least comparable treatment.1

• Multilateral institutions continue to provide adjustment support in the framework of World Bank- and IMF-supported adjust-ment programs.

Paris Club stock-of-debt operation under Naples terms andcomparable treatment by other bilateral and commercialcreditors

is adequatefor the country to reach external debt sustainability.========> Exit(Country does not qualify for HIPC Initiative assistance.)

• Country establishes a second track record by implementing the policies determined at the decision point (which are triggersto reaching the floating completion point) and linked to the (Interim) PRSP.

• World Bank and IMF provide interim assistance.• Paris Club provides flow rescheduling on Cologne Terms (90 percent debt reduction on NPV basis or higher if needed).• Other bilateral and commercial creditors provide debt relief on comparable terms.1

• Other multilateral creditors provide interim debt relief at their discretion.• All creditors and donors continue to provide support within the framework of a comprehensive poverty reduction strategy

designed by governments, with broad participation of civil society and donor community.

• Timing of completion point for nonretroactive HIPCs (i.e., those countries that did not qualify for treatment under the originalHIPC Initiative) is tied to at least one full year of implementation of a comprehensive poverty reduction strategy, includingmacroeconomic stabilization policies and structural adjustment. For retroactive HIPCs (those countries that did qualify underthe original HIPC Initiative), the timing of the completion point is tied to the adoption of a comprehensive PRSP.

• All creditors provide the assistance determined at the decision point; interim debt relief provided between decision and com-pletion points counts toward this assistance.

• All groups of creditors provide equal reduction (in NPV terms) on their claims as determined by the sustainability target.Thisdebt relief is provided with no further policy conditionality.– Paris Club provides stock-of-debt reduction on Cologne terms (90 percent NPV reduction or higher if needed) on eligible debt.– Other bilateral and commercial creditors provide at least comparable treatment on stock of debt.1

– Multilateral institutions provide debt relief, each choosing from a menu of options, and ensuring broad and equitable partici-pation by all creditors involved.

All creditors (multilateral, bilateral, and commercial) commit debt relief to be delivered at the floatingcompletion point.The amount of assistance depends on the need to bring the debt to a sustainable level.This is calculated based on latest available data at the decision point.

Paris Club stock-of-debt operation under Naples terms and comparable treatment by other bilateral andcommercial creditors

is not sufficientfor the country to reach external debt sustainability.========> World Bank and IMF Boardsdetermine eligibility for assistance.

Decision Point

Second Stage

“Floating Completion Point”

Either Or

First Stage

1Recognizing the need for flexibility in exceptional cases.


service obligations to the IMF. The European Unionprovides grants.

10. The World Bank is committed to take actionafter the decision point—through the selective use ofIDA grants and allocations—and at the completionpoint. The principal vehicle for the Bank’s participa-tion, together with some other multilateral creditors,is the HIPC Trust Fund. This Trust Fund providesrelief to eligible countries on debt owed to partici-pating multilaterals and is administered by IDA,with contributions from participating multilateralcreditors and bilateral donors. To provide relief ondebt owed to IDA, the Bank made transfers from itsIBRD net income and surplus to the HIPC TrustFund.

11. The debt contracted with multilateral and bilat-eral creditors, covered by the HIPC Initiative, is lim-ited to public and publicly guaranteed debt—that is,external obligations of a public debtor includingnational government and autonomous public bodiesand external obligations of a private debtor that areguaranteed for repayment by a public entity. Thedebt comprises:• All medium- and long-term government and gov-

ernment-guaranteed external debt;• Short-term debt8 only if it has long been in arrears;• Debt of public enterprises defined as “at least 50

percent owned by the government”; and• Debt of public enterprises being privatized, if the

debt remains with the government.

Treatment of Arrears

12. Countries seeking assistance under the HIPCInitiative need to work toward elimination or reduc-tion of existing arrears and the nonaccumulation ofnew external payments arrears. All arrears to multi-lateral creditors are expected to be cleared, orincluded in an agreement on a schedule for theirclearance before the decision point is reached. How-ever, clearance of such arrears needs to be consistentwith a country’s financing constraint. In addition,concessionality that is granted in arrears-clearanceoperations by multilateral banks can count towardassistance required under the Initiative, on a case-by-case basis.

Debt Sustainability Analysis (DSA)

13. DSAs are central to the work of the HIPC Initia-tive. DSAs are prepared, on a tripartite basis, jointlyby the country authorities, the World Bank, and theIMF and, where appropriate, by the relevant regionaldevelopment banks, such as the African Develop-ment Bank and the Inter-American DevelopmentBank. Figure A5.2 sets out the DSA process in dia-grammatical form.

DSA Process

14. In preparation for the decision point discussion,a DSA is carried out to determine the current exter-nal debt situation of the country. This is essentially amedium-term balance of payments projection thatassesses the debt burden of the country and itscapacity to service those obligations. If external debtratios for that country fall above applicable targetsafter application of traditional debt-relief mecha-nisms, HIPC Initiative assistance is considered.

15. The DSA is undertaken on the basis of debtstock and flow projections. All the informationneeds to be obtained on a loan-by-loan basis, disag-gregated by creditor and currency. The stock of debtis the amount outstanding at the end of the latestavailable fiscal or calendar year, depending onwhether the country operated on a fiscal or calendaryear basis. Projections of financial flows consist ofexpected amortization payments, disbursements onexisting debt, and new loans.

16. Countries seeking assistance under the HIPC Ini-tiative are expected to fully reconcile all debt data ona loan-by-loan basis with the creditor billing recordsbefore the decision point.9 The reconciliation processrefers to the position and flows. If a loan is amortizedaccording to its original schedule (if there are noadjustments such as rescheduling, forgiveness, can-cellations, supplemental commitments, arrears, orprepayments), the periodic flows depend mainly onthe original terms of the loan. Any adjustments to theloan amount, such as write-offs or rescheduling, haveto be taken into account, so that a reconciled debt ser-vice is agreed (and, by extension, the present value ofthe debt). The information needed by a HIPC countrycompiler is set out in Table A5.1.

290

8Debt that has an original maturity of one year or less.9The preliminary HIPC document data might be on the basis of

partially reconciled data.


17. The consistency of stock and flow data onexisting debt needs to be assessed. Simple equationscan help the data compiler to complete this task,such as:• The sum of future repayments of loan principal

equals the outstanding debt (assuming no accrualof interest costs);

• The sum of future disbursements of loan principalequals the undisbursed balance; and

• For interest projections, egregious errors could bechecked by calculating the implied interest rate(interest t/stock of debt t – 1) for a reference yearand comparing it to the interest rate recorded in theoriginal terms. For each loan there is a declining

291

Figure A5.2. Steps Toward a Debt Sustainability Analysis (DSA)

Stock reconciliationLoan terms and basic informationDebt outstanding and disbursedUndisbursed balance

Output TablesDebt outstanding in nominal and in present-value terms at the end of a reference year per creditor. Projected present-value terms and debt service after rescheduling per creditor or loan type.

Debt-Management StrategySustainability indicators are used in a dynamic manner so as to prescribe long-term debt-management strategy.

Prorating Debt ServiceFor present-value calculations, the projected principal repayment is prorated downward if the loan is not fully disbursed in the year for which present value is being calculated.

Sustainability IndicatorsPresent value of debt-to-exports ratio and debt-to-revenues ratio: Prorated present-value debt, including new borrowing for the balance of payments gap.Ratio of debt service to exports: Nominal, rather than the prorated, debt service is used currently.

Balance of PaymentsDebt-service requirement anddisbursement plans, together with other balance of payments items, to determine the overall gap.

Debt reschedulingApply a prospective stock-of-debt (debt outstanding + arrears) on pre-cutoff-date bilateral debt on Naples terms. Assume all multilateral and post-cutoff-date bilateral debt arrears to be repaid the following year or reschedule them on nonconcessional terms. Assume all likely debt restructuring; for example, commercial debt buyback, cancellation of ODA loans, debt swap, etc.

Flows reconciliationDisbursement projectionsPrincipal repayment projectionsInterest charges projections


interest charge as the years progress and the debtstock is being reduced with each amortization.

18. Regarding new loans, given certain underlyingassumptions, the expected financing gap on the bal-ance of payments is projected. This is the baselinescenario. Assumptions have to be made about howthe gap is to be filled—by grants, concessional loans,or commercial borrowing. The terms of any gap-fill-ing loans can be assumed to be the same as theassumptions on new disbursement terms, or they canvary according to the assessment of willingness to fillthe financing gap—if this is possible to assess. Forinstance, new borrowing to finance the gap can be

introduced into the DSA framework as two separateloans for each year. The first might be assumed to beavailable on IDA terms, while the remainder issecured at less concessional terms, but still at a con-cessional rate.

19. Interest charges on new borrowing enter thedebt-service stream six months to one year after theyare assumed to be committed, and the repayments ofthe principal become due after the grace periodended. So, for each year, the balance of paymentsfinancing gap is established, with any resultant newborrowing being fed back into DSA as a new loan.Hence, the balance of payments and the DSA dataare obtained interactively over the projection period,and the new debt-service flows taken into account incalculating the present value10 and debt-service indi-cators that are presented in the decision point docu-ment. This document is the basis for the Bank andIMF Boards’ decisions on the eligibility and amountof assistance for the country.

20. Furthermore, sensitivity analysis is undertaken—the decision point document includes the results ofalternative macroeconomic scenarios, thus providinga quantitative assessment of the impact of downsiderisks of the baseline balance of payments scenario.Modified assumptions are applied to external sectorvariables, such as international prices and trade vol-umes, and availability and terms of the financingitems in the balance of payments. A modification toan assumption may have numerous direct and sec-ondary effects on the balance of payments projectionsand the whole macroframework. In principle there aretwo ways for reflecting the impact of the envisagedshock. The first would be to capture only the immedi-ate direct effect of any adverse shock on the balanceof payments, which is reflected in lower credit entriesor higher debit entries along with a higher additionalfinancing gap. The additional financing gap wouldthen be covered by new borrowing, which in turnwould raise the debt ratios. This is normally the pre-ferred approach for HIPC alternative scenarios.

21. The alternative approach takes into account sec-ondary effects, such as slower economic growth,which would typically dampen the initial increase inthe financing gap. For example, a significant short-

292

Table A5.1. Data Needed by a HIPCCountry Compiler

General information— Debtor— Debtor type (central bank, public enterprises, etc.)— Creditor— Creditor type (official, bilateral, commercial banks)— Debtor loan identification— Creditor loan identification— Project title— Loan type (supplier’s credit, export credit, etc.)— Date of signature— Committed amount and currency of the loan— Disbursed amount— First and last date of amortization— Grace period— Maturity— Interest rate and other charges (fixed or variable

interest rate)— Penalty on arrears— Repayment schedule (equal installments, annuity, etc.)— Cutoff date— Grant element— Identification of ODA loans

At the end of a period— Stock of debt— Arrears on principal (on a loan-by-loan basis)— Arrears on interest— Exchange rates at the end-of-period and average

exchange rate of the year— Average six-month CIRR rates

Disbursements— On “pipeline” debt— New debt

Macroeconomic data— Gross domestic product— Balance of payments— Government finance statistics

Note: ODA, official development assistance; CIRR, CommercialInterest Reference Rate (OECD).

10Debt service on new borrowing did not affect the external debtposition in the reference year used for decision point calculationof assistance.


fall in coffee exports would, in the first instance,cause a higher balance of payments financing gap. Inaddition, however, it would also lead to slower GDPgrowth and lower import demand, which would par-tially compensate for the initial increase in thefinancing gap. However, this approach is appliedonly in cases where the first approach implies highlyunrealistic outcomes.

Interest Rate and Currency AssumptionsUnder the DSA

22. The currency-specific CIRR discount rates usedin DSAs to calculate the present value of externaldebt are averages over the six-month period up to thereference date. For those currencies for which noCIRR rates are available but that are pegged toanother currency, such as the U.S. dollar, the CIRRfor the latter is used. In the absence of an exchangerate arrangement, as well as for the units of accountused by various multilateral institutions, the SDRrate should be applied.

23. The present value of external debt is convertedfrom its currency components into U.S. dollars usingthe actual end-of-period exchange rates—the samedate as the reference date for the gross external debtposition. These rates are applied to base-year calcu-lations, as well as to projections. The conversion ofdebt-service payments in the numerator of the debt-service ratio is performed on the basis of averageexchange rates using actual rates for the past andprojections for the future taken from the IMF’sWorld Economic Outlook.

24. For the purpose of determining a country’s eligi-bility for the fiscal/openness criteria, central govern-ment revenue and GDP used in the revenue-to-GDPratio (the three-year average) at the decision point areconverted into U.S. dollars on the basis of actual aver-age exchange rates in each of the three years. Pro-jected central government revenue used to determinethe NPV of the debt-to-revenue ratio at the comple-tion point are converted by applying the latest end-of-period exchange rate available at the decision point.

293

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Merton, Robert C., 1977, “An Analytical Derivation of theCost of Deposit Insurance and Loan Guarantees,”Journal of Banking and Finance, Vol. 1 (Suppl.),pp. 3–11.

Mody, Ashoka, and Dilip Patro, 1996, “Valuing andAccounting for Loan Guarantees,” World BankResearch Observer, Vol. 11 (February), pp. 119–42.

New Zealand, Department of Finance, annual, BudgetEconomic and Fiscal Update (Wellington).

Obstfeld, Maurice, 1994, “The Logic of Currency Crises,”Cahiers Economiques et Monetaires (Banque deFrance), No. 43, pp. 189–213; available also asNBER Working Paper No. 4640 (Cambridge, Massa-chusetts: National Bureau of Economic Research).

Oesterreichische Nationalbank, 1995, Reports and Sum-maries, 1/1995 (Vienna).

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(Vienna).Organisation for Economic Co-operation and Develop-

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———, annual, Geographical Distribution of FinancialFlows to Aid Recipients (Paris).

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Stephens, Malcolm, 1999, The Changing Role of ExportCredit Agencies (Washington: International MonetaryFund).

Sundaresan, Suresh M., 2002, “Institutional and Analyti-cal Framework for Measuring and Managing Govern-ment’s Contingent Liabilities,” in Government atRisk, pp. 99–122, ed. by Hana Polackova Brixi andAllen Schick (New York: Oxford University Press forthe World Bank).

Towe, Christopher M., 1990, “Government ContingentLiabilities and the Measurement of Fiscal Impact,”IMF Working Paper 90/57 (Washington: InternationalMonetary Fund).

United Nations Conference on Trade and Development(UNCTAD), 1993, Effective Debt Management,UNCTAD/GID/DMS/15 (Geneva: UNCTAD, DMFASProgram).

———, 1998, DMFAS Glossary, UNCTAD/GID/DMFAS/Misc.3/Rev.2 (Geneva: UNCTAD, DMFAS Program).

———, 1999, Proceedings of the Inter-Regional DebtManagement Conference, December 1997, UNCTAD/GDS/DMFAS/Misc.12 (Geneva: UNCTAD, DMFASProgram).

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World Bank, annual, World Development Report(New York: Oxford University Press for the WorldBank).

World Bank, 2000, Debtor Reporting System Manual(Washington).

Accounting principles, external debt, 2.12–2.53,6.1–6.36

Accrual of interest costs, defined, 2.5, App. III. See alsoInterest cost accrual

Accrual recording, Box 2.1Active portfolio management, 11.24ADR. See American depository receiptAffiliated enterprises, defined, App. IIIAgreed minute, defined, App. IIIAmerican depository receipt, App. I (Part 1)Amortization schedules, defined, App. IIIArbitrage, defined, App. IIIArrangement on Guidelines for Officially Supported

Export Credits, App. IIIArrears

classification of, App. I (Part 1)creation of, 2.29debt servicing, 16.19defined, 3.36gross external debt position, 4.4interest cost accrual, 2.81nominal value, 2.40OECD data reporting, 17.32recording dates, App. I (Part 2)third party guarantees, 2.30time of recording, 2.29–2.30traded debt instruments, 2.44valuation, 2.40

Asset-backed securities, classification of, App. I (Part 1)Association of National Numbering Agencies, Box 13.1Australia

contingent liabilities measurement, 9.15country case study, 14.2–14.16

Austria, country case study, 14.17–14.41Average interest rates, 6.18, 7.38–7.39

Balance of paymentscapital account, App. IIIcomparison with OECD data, 17.23–17.38comparison with World Bank data, 17.51–17.62current account, App. IIIdefined, App. IIIfinancial account, App. III

Balance of Payments Manual, Fifth Ed. (BPM5)(IMF), 1.7

Balance of Payments Statistics Yearbook (IMF), 17.13

Balance sheets, App. IV:9–App. IV:14, Fig. A4.1–Fig. A4.3Bank deposits, classification of, App. I (Part 1)Bank for International Settlements

consolidated banking statistics, 17.4, 17.6database of international debt securities, Box 13.1function of, App. IIIInternational Banking Statistics, 17.1–17.9International Securities Statistics, 17.3, 17.10–17.12locational banking statistics, 17.4, 17.6semiannual derivatives data, 12.31–12.32

Banker’s acceptances, 6.11, App. I (Part 1)Banking sector, defined, 3.7Banks

debt guarantees, 12.8–12.10debt statistics compilation, 12.1–12.3external debt, 16.6offshore banks, 12.7reporting debt, 12.4–12.6residency of, 2.21

Barter arrangements, 2.38Basel Committee on Banking Supervision, 9.19BDR. See Bearer depository receiptBearer depository receipt, App. I (Part 1)Berne Union, App. IIIBilateral deadline, defined, App. IIIBilateral debt, defined, App. IIIBilateral rescheduling agreements, defined, App. IIIBIS. See Bank for International SettlementsBlended payments, defined, App. IIIBonds

Brady bonds, App. I (Part 1)classification of, 3.20, App. I (Part 1)commodity-linked, App. I (Part 1)convertible, App. I (Part 1)currency-linked, App. I (Part 1)deep-discount, App. I (Part 1)dual-currency, App. I (Part 1)with embedded call options, App. I (Part 1)with embedded put options, App. I (Part 1)equity-linked, App. I (Part 1)equity-warrant, App. I (Part 1)fixed-rate, App. I (Part 1)foreign, App. I (Part 1)interest cost accrual, 2.28sovereign bond restructuring, Box 8.1structured, App. I (Part 1)

Index

Numbers in references refer to paragraphs in chapters, boxes, or appendices.

297

Index

variable-rate, App. I (Part 1)zero-coupon, App. I (Part 1)

Bonds and notes, 3.20BOPSY. See Balance of Payments Statistics YearbookBorrowing agreements, 11.8–11.9Borrowing sectors, 16.3BPM5. See Balance of Payments ManualBrady bonds, Box 8.1, App. I (Part 1)Brady Plan, Box 8.2Brass plate companies, residency of, 2.18Bullet repayment, defined, App. IIIBuybacks, debt reorganization and, 8.31Buyer’s credit, defined, App. III

Canada, country case study, 14.42–14.63Capital account, defined, App. IIICapital goods, part-payments, App. I (Part 2)Capital transfers, defined, App. IIICapitalized interest, defined, App. IIICash recording, Box 2.1CBDMS. See Computer-based debt-management

systemCDOs. See Collateralized debt obligationsCD. See Certificate of depositCensus data, debt statistics compilation, 12.14Center of economic interest, defined, 2.15Certificate of deposit, classification of, App. I (Part 1)Chile, country case study, 14.64–14.79CIRRs. See Commercial Interest Reference RatesClaim payments, defined, App. IIIClaims-waiting period, defined, App. IIICMFB. See Committee on Monetary, Financial and

Balance of Payments StatisticsCofinancing, defined, App. IIICollateralized debt obligations, classification of, App. I

(Part 1)Collateralized external debt, App. I (Part 2)Collateralized loan approach, 3.31Commercial banks, debt relief, Box 8.2Commercial contracts, penalties, App. I (Part 2)Commercial credit, defined, App. IIICommercial Interest Reference Rates, 8.18, App. IIICommercial paper, classification of, App. I (Part 1)Commercial risk, defined, App. IIICommitment, defined, App. IIICommitment, date of, defined, App. IIICommitment charge, defined, App. IIICommittee on Monetary, Financial and Balance of

Payments Statistics, Box 14.1Commodities, as debt repayment, 2.37–2.38Commodity-linked bonds, classification of, App. I

(Part 1)Commodity-linked derivatives, classification of, App. I

(Part 1)Commonwealth Secretariat, technical assistance,

19.2–19.4

Commonwealth Secretariat Debt Recording andManagement System. See Debt Recording andManagement System (Commonwealth Secretariat;CS-DRMS)

Comparable treatment, defined, App. IIIComplete market, defined, 9.18, App. IIICompletion point, defined, App. IIICompound interest, interest cost accrual, 2.68–2.69Computer-based debt-management system, 11.17Computer systems, traded securities debt statistics

compilation, 13.6Concessional debt, defined, 6.22Concessional loans, defined, App. IIIConcessional restructuring, defined, App. IIIConcessionality level, defined, App. IIIConsensus. See Arrangement on Guidelines for Officially

Supported Export CreditsConsignment trade, App. I (Part 2)Consolidated amount, defined, App. IIIConsolidated banking statistics, 17.4, 17.6Consolidated debt, defined, App. IIIConsolidated reporting, defined, App. IIIConsolidation, value of debt, App. I (Part 2)Consolidation period, defined, App. IIIContingent assets, defined, App. IIIContingent liabilities

credit conversion factors, 9.19defined, 2.10, 9.3, App. IIIexplicit, 9.4–9.8implicit, 9.9–9.10market value measures, 9.20maximum potential loss measurement method, 9.14,

9.16measuring, 9.11–9.23option-pricing measurement methods, 9.21–9.22present value measurement method, 9.17public sector guarantees, 9.24ultimate risk, 9.25–9.29

Convertible bonds, classification of, App. I (Part 1)Coordinated Portfolio Investment Survey, 13.35–13.36Cover, defined, App. IIICover limits, defined, App. IIICoverage of rescheduling agreements, defined, App. IIICP. See Commercial paperCPIS. See Coordinated Portfolio Investment SurveyCredit, defined, App. IIICredit availability guarantees, 9.7–9.8Credit conversion factors, 9.19Credit derivatives, classification of, App. I (Part 1)Credit guarantees, 9.6, App. IIICredit insurance, defined, App. IIICredit-linked external debt, projected payments, 6.34Credit-linked notes, classification of, App. I (Part 1)Creditor, defined, App. IIICreditor country, defined, App. IIICreditor Reporting System (OECD)

defined, App. III

298

Bonds (continued)

Index

dissemination of external debt statistics, 17.1–17.2,17.17–17.22

Creditor sectorsexternal debt by, 7.40–7.43information concerning, 16.37–16.39multilateral organizations, 6.4official creditors, 6.5types of, 6.3

Cross-border activity, debt statistics compilation, 12.12Cross-border positions, defined, App. IIICross-border trade-related credit, 7.55–7.56Currency

classification of, 3.34, App. I (Part 1)composition of external debt, 16.14issued by a monetary authority of another economy,

7.20Currency and deposits, defined, 3.34Currency composition

domestic, 6.12foreign currency debt, 6.13

Currency-linked bonds, classification of, App. I (Part 1)Currency of reporting, defined, App. IIICurrency of transaction, defined, App. IIICurrency pool loans, classification of, 6.26, App. I

(Part 1)Currency swaps, 7.27Current account, defined, App. IIICurrent liabilities, 2.10Current maturities, defined, App. IIICurrent transfers, defined, App. IIICutoff date

for debt reorganization, Box 8.2defined, App. III

DAC. See Development Assistance CommitteeData collection, 11.4–11.7Data compilation, 10.1–10.3, 11.4–11.7, Fig 10.1. See

also StatisticsData Template on International Reserves and Foreign

Currency Liquidity, 7.31DDSR. See Debt- and debt-service-reduction

operationsDe minimis creditors, defined, App. IIIDebt- and debt-service-reduction operations, defined,

App. IIIDebt assumption

for debt reorganization, 8.45–8.49defined, 8.45, App. III

Debt buyback, defined, 8.31, App. IIIDebt conversion

for debt reorganization, 8.7, 8.29–8.30debt swaps, 8.6defined, 8.29, App. IIIexternal debt position, 8.32OECD data reporting, 17.38

Debt-conversion bonds, App. I (Part 1)Debt default, defined, App. III

Debt exchanges, 8.7Debt-for-charity swaps, defined, App. IIIDebt-for-commodity swaps, defined, App. IIIDebt-for-development swaps, defined, App. IIIDebt-for-equity swaps

debt conversion, 8.30defined, 8.30, App. III

Debt-for-nature swaps, defined, App. IIIDebt forgiveness

for debt reorganization, 8.7, 8.23–8.24defined, 8.23, App. IIIexternal debt position, 8.25–8.28OECD data reporting, 17.34–17.35

Debt instrumentsclassification of, 16.9–16.10data collection, 11.15defined, App. IIInontraded, 2.35–2.41traded, 2.42–2.44

Debt liabilities, 2.4Debt Management and Financial Analysis System

(UNCTAD; DMFAS)analytical functions, 18.27–18.40executive management, 18.41operating, controlling, and monitoring, 18.20–18.26operational management, 18.12reporting facilities, 18.27–18.36technical characteristics, 18.42–18.49

Debt-monitoring systems, Box 7.1Debt office

active portfolio management, 11.24analytical function, 11.22collection and compilation of data, 11.4–11.16controlling and coordinating functions, 11.23data validation, 11.18–11.19executive debt management, 11.20–11.21functions of, 11.20–11.26information storage, 11.17monitoring function, 11.23operations function, 11.22organizational structure, 11.25–11.26, Fig. 11.1recording function, 11.22

Debt operations, defined, App. IIIDebt prepayments, 8.29, 8.31, 8.32Debt ratios, 15.10–15.29

debt service to exports, 15.21–15.25debt to exports, 15.14–15.16debt to GDP, 15.17–15.19internal reserves to short-term debt, 15.26–15.29present value of debt to exports, 15.14–15.16present value of debt to fiscal revenue, 15.20present value of debt to GDP, 15.17–15.19

Debt Recording and Management System(Commonwealth Secretariat; CS-DRMS)

coverage, 18.3domestic debt module function, 18.4external debt module function, 18.4

299

Index

management tools manual function, 18.5technical characteristics, 18.7–18.8

Debt reductionfor debt reorganization, 8.17–8.22, 8.34–8.44defined, 8.5external debt position, 8.25–8.28

Debt reduction in present value terms, defined, 8.5Debt-reduction option

for debt reorganization, 8.19defined, App. III

Debt refinancing, defined, 8.11, App. IIIDebt relief, defined, 8.4, App. IIIDebt reorganization

borrowing for balance of payments support, 8.50buybacks, 8.31commercial bank debt relief, Box 8.2cutoff date, Box 8.2debt assumption, 8.45–8.49debt conversion, 8.7, 8.29–8.30debt forgiveness, 8.7, 8.23–8.28debt reduction, 8.5, 8.17–8.22, 8.25–8.27, 8.34–8.44debt relief, 8.4debt rescheduling, 8.7, 8.10–8.12debt swaps, 8.6defined, 8.3, App. IIIexternal debt position, 8.13–8.15, 8.25–8.27, 8.32flow data, 8.16, 8.28, 8.33function of, 8.1new money facilities, 8.51packages, 8.8prepayments, 8.29, 8.31statistical treatment of, 8.9types of, 8.7

Debt reschedulingfor debt reorganization, 8.7, 8.10–8.12defined, 8.10, App. IIIOECD data reporting, 17.36–17.37

Debt restructuringdata collection, 11.15defined, App. III

Debt securities, classification of, 3.29. See also SecuritiesDebt service, defined, App. IIIDebt-service ratio, defined, App. IIIDebt-service-reduction option

for debt reorganization, 8.19defined, App. III

Debt-service schedules, 1.10, 6.23, 7.2, 7.8–7.16Debt-service-to-exports ratio

for debt sustainability, 15.22–15.25defined, 15.21, App. III

Debt servicing, 16.18–16.19Debt statistics. See StatisticsDebt sustainability

creation of debt, 15.1–15.3debt ratios, 15.10–15.13debt-service-to-exports ratio, 15.21–15.25

debt-to-exports ratio, 15.14–15.16debt-to-GDP ratio, 15.17–15.19international reserves-to-short-term debt ratio,

15.26–15.29liquidity, 15.6medium-term debt scenarios, 15.7–15.9present value of debt-to-exports ratio, 15.14–15.16present value of debt-to-fiscal revenue ratio, 15.20present value of debt-to-GDP ratio, 15.17–15.19solvency, 15.4–15.5

Debt sustainability analysiscurrency assumptions, App. V:22–App. V:24defined, App. IIIfunction of, App. V:1interest rate assumptions, App. V:22–App. V:24process, App. V:14–App. V:21tools for, 15.3

Debt swapsdebt-for-development, 8.6debt-for-domestic currency, 8.6, App. IIIdebt-for-equity, 8.6, App. IIIdebt-for-exports, 8.6, App. IIIdebt-to-debt, 8.6, App. IIIdefined, 8.6, App. III

Debt-to-exports ratio, 15.14–15.16Debt-to-GDP ratio, 15.17–15.19Debt-with-equity warrants, App. I (Part 1)Debt workout, defined, App. IIIDebt write-offs, 8.3Debtor country, defined, App. IIIDebtor Reporting System (World Bank)

comparison with IIP data, 17.51–17.62comparison with OECD data, 17.63–17.69concepts, 17.55–17.62defined, App. IIIfunction of, 8.2, 17.1–17.2, 17.39–17.50presentation of data, 17.51–17.54

Decision point, defined, App. IIIDeep-discount bonds, classification of, App. I (Part 1)Defeasement, App. I (Part 2)Deferred payments, defined, App. IIIDefined-benefit pensions, debt liabilities, 2.39Depository receipts

American, App. I (Part 1)bearer, App. I (Part 1)classification of, App. I (Part 1)

Depositsclassification of, 3.34, App. I (Part 1)interest cost accrual, 2.71–2.72projected interest payments, 6.28–6.29

Deposits in mutual associations, App. I (Part 1)Derivatives. See Financial derivativesDevelopment Assistance Committee

annual questionnaire, 17.17, 17.22defined, App. IIIfunction of, 8.2List of Aid Recipients, 17.24

300

Debt Recording and Management System (continued)

Index

Development Co-operation Report (OECD), 17.17Direct investment, 3.14–3.18, 12.33Direct reporting companies, 12.21Disbursed and outstanding debt, 1.3–1.5Disbursed loans, defined, App. IIIDisbursements, defined, App. IIIDiscount bonds, App. I (Part 1)Discounted instruments, interest cost accrual,

2.74–2.76Discounted principal, interest cost accrual, 2.64–2.65DMFAS, See Debt Management and Financial Analysis

System (UNCTAD) DOD. See Disbursed and outstanding debtDomestic currency

defined, 6.12, App. IIIexternal debt composition, 6.12, 7.19–7.21

Domestic currency debt, 6.12Domestic-currency-linked debt, 6.13Domestic currency unit, 2.51Domestically issued securities

classification of, 6.21nonresident investment, 13.10–13.25

DRCs. See Direct reporting companiesDRS. See Debtor Reporting SystemDSA. See Debt sustainability analysisDual-currency bonds, classification of, App. I (Part 1)Due-for-payment recording, Box 2.1Duration, defined, App. III

Early repayment provisions, projected payments, 6.33ECB. See European Central BankEconomic territory, defined, 2.14EFF. See Extended fund facilityEligible debt, defined, App. IIIEligible debt service, defined, App. IIIEmbedded derivatives, instruments with, 2.89Enhanced concessions, defined, App. IIIEnhanced Structural Adjustment Facility, defined,

App. IIIEnhanced Toronto terms, defined, App. IIIEnterprise surveys

agency coordination, 12.13census data, 12.14confirming data reliability, 12.20cross-border activity, 12.12debt statistics compilation, 12.11encouraging participation, 12.19form testing, 12.18group level approach, 12.15partial coverage collections, 12.14random samples, 12.14stratified random samples, 12.14survey development, 12.16–12.18

Equity, classification of, App. I (Part 1)Equity capital

defined, 3.16valuation, 2.49

Equity liabilitiesand external debt, 1.7memorandum tables, 4.12–4.13

Equity-linked bonds, classification of, App. I (Part 1)Equity-linked derivatives, classification of, App. I (Part 1)Equity securities

defined, 3.23valuation, 2.48

Equity-warrant bonds, classification of, App. I (Part 1)ESA95. See European System of Accounts: ESA 1995ESAF. See Enhanced Structural Adjustment FacilityESAF-HIPC Trust, defined, App. IIIESCB. See European System of Central BanksEscrow accounts, defined, App. IIIEU. See European UnionEurobonds, restructuring, Box 8.1European Central Bank, 19.5–19.8European Commission, Box 14.1European System of Accounts: ESA 1995, Box 14.1European System of Central Banks, 19.5European Union, statistics on the excessive deficit

procedure, Box 14.1Eurostat. See European CommissionEurosystem, 19.5Exceptional financing, defined, App. IIIExchange rate conversion, 2.52Exchange rates, data collection, 11.14Executive debt management, 11.20–11.21Explicit contingent liabilities

credit availability guarantees, 9.7–9.8credit guarantees, 9.6defined, 9.4loan guarantees, 9.5payment guarantees, 9.5

Export credit, defined, App. IIIExport credit agencies

defined, App. IIIreinsurance by, App. III

Exportsdebt-service-to-exports ratio, 15.21–15.25debt-to-exports ratio, 15.14–15.16present value of debt-to-exports ratio, App. III

Extended Fund Facility, defined, App. IIIExternal debt

accounting principles, 2.12–2.53, 6.1–6.36analysis of, 1.6–1.8, 16.1–16.39compatibility of data, 2.2composition of, 16.1–16.19creditor information, 16.37–16.39by creditor sectors, 7.40–7.43current liabilities, 2.10defined, 2.1, 2.3, App. IIIfinancial derivatives, 16.30–16.34foreign currency composition, 1.10gross external debt, 2.3, 4.1–4.15interest rate composition, 7.35–7.37loan drawings, 2.23

301

Index

net external debt, 1.10, 7.44–7.47outstanding liabilities, 2.4principal, 2.5–2.8public sector, 5.1–5.10reconciliation of positions and flows, 7.48–7.49relationship with financial instruments in the 1993 SNA,

2.11repurchase agreements, 16.35–16.36residence determination, 2.9role of assets, 16.22–16.29role of income, 16.20–16.21by short-term remaining maturity, 7.5–7.7See also Gross external debt

External Debt Statistics (OECD), 17.17–17.18

Face valuedefined, 2.33, App. IIInominal value and, 2.33

Financial accountsbalance sheets, App. IV:9–App. IV:14, Fig. A4.1–Fig. A4.3features of, App. IV:3–App. IV:4financial assets, App. IV:5–App. IV:6institutional sectors, App. IV:7

Financial asset, defined, App. IIIFinancial claims, defined, App. IIIFinancial derivatives contracts

foreign currency and, 6.27paying or receiving foreign currency, 6.27, 7.25, 7.29

Financial derivativesdata collection from transactions, 11.16debt statistics compilation, 12.28–12.32defined, 2.11, App. IIIexternal debt and, 1.7, 16.30–16.34function of, 3.24, 3.25market value, 2.46memorandum table, 4.10–4.11notional amount, 7.27, 7.29

Financial instrumentsclassification of, 3.1, 3.3, App. I (Part 1)direct investment, 3.14–3.18financial derivatives, 3.24–3.25other investment, 3.26–3.37portfolio investment, 3.19–3.23reserve assets, 3.38

Financial leasesdefined, 3.33projected payments, 6.36residual value, App. I (Part 2)

Financial liability, defined, App. IIIFiscal revenue, present value of debt-to-fiscal revenue

ratio, 15.20Fixed-rate bonds, classification of, App. I (Part 1)Fixed-rate external debt instruments, 6.15–6.17Fixed-rate instruments

interest cost accrual, 2.70–2.81nominal value, 2.32

Flag-of-convenience countries, defined, App. IIIFlow rescheduling, defined, 8.12, App. IIIForeign bonds, classification of, App. I (Part 1)Foreign currency

defined, App. IIIexternal debt composition, 1.10, 7.17–7.21financial derivative contracts and, 6.27gross external debt, 7.22–7.29projected payments and nonresidents, 7.30–7.34revaluing end-period positions, 12.43–12.45

Foreign currency debtdefined, 6.13forex swaps, 7.27forwards and options contracts and, 7.28projected payments, 6.25–6.26by type of currency, 6.14

Foreign currency instruments, interest cost accrual, 2.90Foreign-currency-linked debt, 6.13, 7.19, 12.39–12.45Foreign-currency-linked derivatives, classification of,

App. I (Part 1)Foreign issued securities, 6.21Foreign markets, issues of securities by residents,

13.26–13.28Forfaiting, defined, App. IIIForward-type derivatives

defined, 3.25classification of, App. I (Part 1)

Forwards, 7.28Front-loaded interest reduction bonds, App. I (Part 1)Fund credit. See Use of IMF credit and loansFungible bonds, interest cost accrual, 2.76

GDDS. See General Data Dissemination SystemGDF. See Global Development FinanceGDP. See Gross domestic productGDRCs. See General direct reporting companiesGeneral Data Dissemination System, Box 4.1General direct reporting companies, 12.21General government sector, defined, 3.6. See also

Government sectorGeographical Distribution of Financial Flows to Aid

Recipients (OECD), 17.17, App. IIIGlobal Development Finance, 17.39Global note facilities, 9.8GNFs. See Global note facilitiesGNP. See Gross national productGold swaps, 3.31, App. I (Part 1)Goods

as debt repayment, 2.37–2.38prepayments, App. I (Part 2)processing, App. I (Part 2)

Goodwill clause, defined, App. IIIGovernment debt office. See Debt officeGovernment sector

debt statistics, 11.1–11.26defined, 3.6

302

External debt (continued)

Index

Grace periodsdefined, App. IIIinterest cost accrual and, 2.88

Graduated payments, defined, App. IIIGrant elements, defined, App. IIIGrant-like flows, defined, App. IIIGrey Book, 1.2, 1.5, 1.8Gross domestic product

debt-to-GDP ratio, 15.17–15.19defined, App. III

Gross external debtdefined, 2.3foreign currency, 7.22–7.29Grey Book definition, 1.2outstanding liabilities, 4.8–4.9presentation table, 4.3–4.6reverse security transactions, 4.14–4.15See also External debt

Gross national product, defined, App. IIIGuaranteed export credit, defined, App. IIIGuaranteed external debt, 16.8, App. I (Part 2)Guaranteed payments, 2.30

Heavily indebted poor countriesdebt reorganization, Box 8.2debt sustainability analysis, App. V:1, App. V:13–App.

V:24, Fig. A5.2defined, App. IIISee also HIPC Initiative

Helsinki Package, defined, App. IIIHigh-frequency debt-monitoring systems, Box 7.1High-income countries, defined, App. IIIHIPC. See Heavily indebted poor countriesHIPC Initiative

defined, App. IIIdescription of, App. V:2–App. V:3eligibility criteria, App. V:4–App. V:11origin of, App. V:2–App. V:3Paris Club and, Box 8.2structure of, App. V:4–App. V:12, Fig. A5.1See also Heavily indebted poor countries

HIPC Trust Fund, defined, App. IIIHome country, defined, App. IIIHost country, defined, App. IIIHousehold sector, debt statistics compilation,

12.34–12.35Households and nonprofit institutions serving households

sector, 3.11Houston terms. See Lower-middle-income-country terms

IBRD. See International Bank for Reconstruction andDevelopment

IBS. See International Banking StatisticsIDA. See International Development AssociationIFMS. See Integrated Financial Management SystemIFS. See International Financial StatisticsIIP. See International investment position

IMF. See International Monetary FundIMF adjustment program, defined, App. IIIIMF arrangement, defined, App. IIIImplicit contingent liabilities, 9.9–9.10Importers, trade-related credit, 6.10–6.11Index-linked instruments

interest cost accrual, 2.84–2.87projected payments, 6.30

Index-linked securities, classification of, App. I (Part 1)India

contingent liabilities measurement, 9.15country case studies, 14.80–14.107

Industrial concentration of debt, 16.17Initial margins, App. II:10Institutional sectors

banking, 3.7defined, App. IIIfinancial accounts, App. IV:7general government, 3.6households and nonprofit institutions serving

households, 3.11intercompany lending liabilities, 3.12monetary authorities, 3.5nonbank financial corporations, 3.9nonfinancial corporations, 3.10other sectors category, 3.8

Institutional unitsclassification of, 3.1–3.2defined, App. IIIresidency of, 2.15–2.16

Insurance companies, debt liabilities, 2.39Insured export credit, defined, App. IIIIntegrated Financial Management System, 11.13Inter-Agency Task Force on Finance Statistics, 17.70Interbank positions, defined, App. IIIIntercompany lending

gross external debt position, 3.15, 4.4liabilities, 3.12

Interestdefined, 2.5, App. IIIfixed rate, 2.32late, 2.81late charges, App. IIIpayments, 2.5, 2.7periodical payments, 2.6predetermined, 2.83projected payments on deposits, 6.28–6.29schedule of payments, 2.8variable rate, 2.32See also Interest cost accrual

Interest cost accrualarrears, 2.81compound interest, 2.68–2.69costs not yet payable, 2.26–2.28, 2.54–2.55, 4.9defined, 2.5, App. IIIdeposits, 2.71–2.72discounted principal, 2.64–2.65

303

Index

fixed-rate instruments, 2.70–2.81foreign currency instruments, 2.90fungible bonds, 2.76implementation of, 2.25, 2.54–2.56index-linked instruments, 2.84–2.87instruments issued at a discount, 2.74–2.76instruments with embedded derivatives, 2.89instruments with grace periods, 2.88interest-rate-linked instruments, 2.82–2.83loans, 2.70present value, 2.59–2.66securities, 2.73straightline approach, 2.67, 2.69stripped securities, 2.77–2.80theoretical framework, 2.57–2.58variable-rate instruments, 2.82–2.87zero-coupon instruments, 2.66

Interest-rate-linked derivativesclassification of, App. I (Part 1)external debt and, 7.36–7.37

Interest-rate-linked instruments, interest cost accrual,2.82–2.83

Interest ratesaverage interest rates, 6.18, 7.38–7.39composition of external debt, 7.35–7.37, 16.16data collection, 11.14fixed-rate external debt instruments, 6.15–6.17interest rate level, 6.19moratorium interest, Box 8.2risk-neutral rates, 8.18variable-rate external debt instruments, 6.15–6.17weighted average interest rates, 6.20, 7.39

International Bank for Reconstruction and Development,App. III

International banking business, defined, App. IIIInternational Banking Statistics (BIS), 17.1–17.9International Development Association, 11.25, App. IIIInternational Financial Statistics (IMF), 17.13International interbank market, defined, App. IIIInternational investment position

comparison with OECD data, 17.23–17.38comparison with World Bank data, 17.51–17.62core principles, App. IV:28–App. IV:30coverage of financial instruments, App. IV:15–App.

IV:36, Fig. A4.4data reporting, 17.13–17.16defined, 17.14, App. IIIrelationship with national accounts, App. IV:1–App. IV:2

International Monetary Fundfunction of, 17.1–17.2, 17.13–17.16, App. IIItechnical assistance, 19.9–19.14

International reserve assets, 16.23International reserves-to-short-term debt ratio, 15.26–15.29International Securities Statistics (BIS), 17.3, 17.10–17.12International security identification number, 6.21, Box

13.1, App. III

ISIN. See International security identification numberIslamic banking, App. I (Part 2)Israel, country case study, 14.108–14.114

Joint BIS-IMF-OECD-World Bank Statistics on ExternalDebt, 17.17, 17.39, 17.70–17.74, Box 17.1

Joint venture, defined, App. III

Land ownership, classification of, App. I (Part 1)Late interest, 2.81Late interest charges, defined, App. IIILearning and Innovation Loan, 19.28Letters of credit

classification of, App. I (Part 1)defined, 9.6

Leverage, defined, App. IIILiabilities

contingent, 2.10, 9.1–9.29current, 2.10equity, 4.12–4.13outstanding, 2.4

Liberalization, statistics collection techniques at differentstages of, 10.16–10.22

LIBOR. See London interbank offered rateLife insurance, debt liabilities, 2.39LIL. See Learning and Innovation LoanLine of credit, defined, 9.6, App. IIILinear bonds, interest cost accrual, 2.76Liquidity, 15.6Loan agreement, defined, App. IIILoan commitments, defined, 9.6Loan guarantees, 9.5, App. IIILoans

classification of, App. I (Part 1)defined, 3.28interest cost accrual, 2.70

Loans not fully disbursed, projected payments, 6.31Locational banking statistics, 17.4, 17.6London Club, Box 8.2, App. IIILondon interbank offered rate, defined, App. IIILondon terms. See Concessional restructuringLong-maturities option, defined, App. IIILong-term debt, defined, 2.53Long-term external debt, 6.7–6.8, App. IIILow-income countries, defined, App. IIILower-middle-income-country terms, defined, App. IIILyon terms. See Concessional restructuring

Margin payments, App. II:10Market rate, exchange rate conversion, 2.52Market valuation, defined, App. IIIMarket value

arrears, 2.44composition of external debt, 16.13determination of, 2.31estimation of, 2.31, Box 2.2interest cost accrual, 2.56

304

Interest cost accrual (continued)

Index

305

nondebt instruments, 2.45–2.46traded debt instruments, 2.34, 2.42–2.43, 7.50–7.51

Maturitycomposition of external debt, 16.11–16.12defined, 2.53long-term/short-term, 2.53“open,” 6.35remaining maturity measures, 6.6–6.8short-term remaining maturity, 6.7, 7.5–7.7

Maturity date (final), defined, App. IIIMaturity structure, defined, App. IIIMedium-term debt scenarios, 15.7–15.9Medium-term notes, classification of, App. I (Part 1)Memorandum items, 4.7–4.15Mexico, country case study, 14.115–14.135Military debt, classification of, App. I (Part 1)Miscellaneous accounts payable and receivable. See Other

accounts payable and receivableMixed credits, defined, App. IIIMOFs. See Multiple options facilitiesMonetary authorities sector, 3.5Money market instruments

classification of, App. I (Part 1)defined, 3.21

Monitoring systems. See Debt-monitoring systemsMoratorium interest, App. III, Box 8.2Mortgage-backed securities, classification of, App. I

(Part 1)MTNs. See Medium-term notesMultilateral creditors, defined, App. IIIMultilateral organizations, 6.4Multiple options facilities, 9.8Multiyear rescheduling agreement, defined, App. IIIMutual fund shares, classification of, App. I (Part 1)MYRA. See Multiyear rescheduling agreement

Naples terms. See Concessional restructuringNational accounts, relationship with IIP, App. IV:1–App.

IV:2, App. IV:8National numbering agencies, Box 13.1, App. IIINationality, defined, App. IIINDFs. See Nondeliverable forward contractsNegotiable financial instruments, interest cost accrual, 2.75Net external debt, 1.10, 7.44–7.47Net flow, defined, App. IIINet present value of debt, defined, App. IIINet resource transfer, defined, App. IIINew Zealand

contingent liabilities measurement, 9.14country case study, 14.136–14.155

NIFs. See Note issuance facilities1993 SNA. See System of National Accounts 1993NNAs. See National numbering agenciesNominal amount, 2.46, App. IIINominal value

arrears, 2.40composition of external debt, 16.13

debt statistics compilation, 12.31defined, 2.32, App. IIIestablishment of, 2.31–2.32face value and, 2.33interest cost accrual, 2.56nontraded debt instruments, 2.35–2.36, 2.41traded debt instruments, 2.42, 7.50–7.51

Nonbank financial corporations sector, 3.9Nonconsolidated debt, defined, App. IIINondebt instruments, 2.45–2.49Nondeliverable forward contracts, classification of, App. I

(Part 1)Nonfinancial corporations sector, 3.10, 16.7Nonguaranteed private sector external debt, defined, 5.6Nonlife insurance, App. I (Part 2)Nonparticipating preferred shares, classification of, App. I

(Part 1)Nonprofit institutions serving households, defined, 3.11Nonresident agencies, 2.20Nonresident deposits, App. I (Part 2)Nonresidents

determination of, 2.13–2.21 investment in domestically issued securities,

13.10–13.25location of debt securities issuance, 7.52–7.54projected payments in foreign currencies, 7.30–7.34

Nontraded debtclassification of, App. I (Part 1)estimating position data and, 12.37valuation of, 2.35–2.41

Nostro accounts, App. I (Part 1)Note issuance facilities

classification of, App. I (Part 1)credit availability guarantees, 9.7defined, 9.7

Notesclassification of, 3.20, App. I (Part 1)credit-linked, App. I (Part 1)medium-term, App. I (Part 1)perpetual floating-rate, App. I (Part 1)promissory, App. I (Part 1)structured floating-rate, App. I (Part 1)variable-rate, App. I (Part 1)

Notional amount, 2.46, 7.27, 7.29, App. IIINotional value

debt statistics compilation, 12.31gross external debt interest rate composition, 7.36gross external foreign currency debt, 7.25

NPISH See Nonprofit institutions serving householdsNPV. See Net present value of debt

ODA. See Official development assistanceODF. See Official development financeOECD. See Organisation for Economic Co-operation and

DevelopmentOECD Consensus. See Arrangement on Guidelines for

Officially Supported Export Credits

Index

OECD Working Party on Export Credits and CreditGuarantees, function of, App. III

Official bilateral creditors, 6.5Official creditors, 6.5Official development assistance, defined, App. IIIOfficial development assistance loans, defined, App. IIIOfficial development bank, function of, App. IIIOfficial development finance, defined, App. IIIOfficial multilateral creditors, 6.4Officially supported export credits, defined, App. IIIOffshore banks

reporting debt, 12.7residency of, 2.17

Offshore enterprises, residency of, 2.17, 2.19Offshore financial center, defined, App. IIIOn-lending of borrowed funds, App. I (Part 2)OOFs. See Other official flowsOperational leases, classification of, App. I (Part 1)Option pricing, 9.21–9.22Options

classification of, App. I (Part 1)defined, 3.25foreign currency options, 7.28valuation, 2.47

ORACLE, 18.11, 18.44–18.45Organisation for Economic Co-operation and Development

Commercial Interest Reference Rates, 8.18comparison with balance of payments/IIP data,

17.23–17.38comparison with World Bank data, 17.63–17.69Creditor Reporting System, 17.1–17.2, 17.17–17.22Development Assistance Committee, 8.2, 17.11, 17.22,

17.24, App. IIIfunction of, App. IIIreporting systems, 17.19–17.22technical assistance, 19.15–19.16

Original maturity, defined, 2.53, App. IIIOther accounts payable and receivable, classification of,

App. I (Part 1)Other assets/other liabilities, defined, 3.25Other debt liabilities, defined, 3.35Other official flows, defined, App. IIIOther sectors category, 3.8Outstanding liabilities, 2.4, 4.8–4.9Own offices, defined, App. IIIOwnership change date, 2.23

Par bonds, App. I (Part 1)PARIS21. See Partnerships in Statistics for Development

in the 21st CenturyParis Club

debt rescheduling, 8.19, Box 8.2function of, App. IIIas official bilateral creditor, 6.5

Part-payments, for capital goods, App. I (Part 2)Partial coverage collections, debt statistics compilation,

12.14

Partial direct reporting companies, 12.21Participating preferred shares, classification of, App. I

(Part 1)Partnerships in Statistics for Development in the 21st

Century, 19.16Payment guarantees, 9.5Payment schedules

credit-linked external debt, 6.34debt-service, 1.10, 6.23, 7.2, 7.8–7.16early repayment provisions, 6.33financial leases, 6.36foreign currencies and nonresidents, 7.30–7.34foreign currency external debt, projected, 6.25–6.26index-linked external debt, projected, 6.30interest on deposits, projected, 6.28–6.29loans not fully disbursed, projected, 6.31projecting payments, 6.24reverse transactions, projected, 6.35securities with embedded options, 7.13–7.15service-related debts, projected, 6.32time periods, 7.10–7.12

PDRCs. See Partial direct reporting companiesPenalties, commercial contracts and, App. I (Part 2)Pension funds, debt liabilities, 2.39Periodic interest costs, memorandum table, 4.8–4.9Periodical interest payments, 2.6Permanent interest-bearing shares, classification of, App. I

(Part 1)Perpetual floating-rate notes, classification of, App. I

(Part 1)Philippines, country case study, 14.156–14.175PIBS. See Permanent interest-bearing sharesPolitical risk, defined, App. IIIPortfolio investment, 3.19–3.23Portfolio management, 11.24Post-cutoff-date debt. See Cutoff datePoverty Reduction and Growth Facility, defined, App. IIIPredetermined interest, 2.83Preferred shares

classification of, App. I (Part 1)participating, App. I (Part 1)

Premiums, defined, App. IIIPrepayments

debt reorganization, 8.29, 8.31, 8.32defined, App. IIIfor goods and services, App. I (Part 2)

Present valuedefined, App. IIIinterest cost accrual, 2.59–2.66

Present value of debt-to-exports ratiodebt sustainability and, 15.14–15.16defined, App. III

Present value of debt-to-fiscal revenue ratio, 15.20Present value of debt-to-GDP ratio, 15.17–15.19Previously rescheduled debt, defined, App. IIIPRGF. See Poverty Reduction and Growth Facility

306

Index

Principaldefined, 2.5, App. IIIdiscounted, 2.64–2.65payments, 2.5, 2.7schedule of payments, 2.8, 7.9

Principal repayment schedule, defined, App. IIIPrivate creditors, defined, App. IIIPrivate sector, defined, 5.5Project loan disbursements, App. I (Part 2)Projected payments. See Payment schedulesPromissory notes, classification of, App. I (Part 1)Provisioning, defined, App. IIIPSRL. See Public Sector Reform LoanPublic corporation, defined, 5.5Public debt, defined, App. IIIPublic external debt, defined, 5.10, App. IIIPublic investment projects, App. I (Part 2)Public sector

contingent liabilities guarantees, 9.24debt statistics, 11.1–11.26defined, 5.5external debt, 5.1–5.10, 16.4

Public Sector Reform Loans, 19.29Publicly guaranteed private sector external debt, defined, 5.6

Quantitative limits, defined, App. IIIQuasi-corporations, 3.6

Random samples, debt statistics compilation, 12.14RDBMS. See Relational Database Management SystemRecording, time of, 2.22–2.25Recording basis, Box 2.1Recoveries, defined, App. IIIReference units of account, 2.50Refinancing, 8.7. See also Debt refinancing; Debt

reschedulingRegional central banks, residency of, 2.21Registers of external loans, 12.22Reinsurance, App. I (Part 2)Reinsurance by export credit agencies, defined, App. IIIReinvested earnings on foreign direct investments, 2.49Relational Database Management System, 18.11Remaining maturity

defined, 6.6–6.8, App. IIImeasures, 7.5–7.7

Reorganization. See Debt reorganizationRepayment period, defined, App. IIIRephasing, defined, App. IIIReporting banks, defined, App. IIIRepos. See Repurchase agreementsRepudiation of debt

defined, App. IIInonrecognition, 2.22

Repurchase agreementsdefined, 3.31, App. IIdelay in returning security, App. I (Part 2)function of, App. II:4–App. II:12

Rescheduling. See Debt reschedulingRescheduling agreement, defined, App. IIIReserve assets, 3.38Residence

brass plate companies, 2.18center of economic interest, 2.15defined, 2.13determination of, 2.9economic territory, 2.14institutional units, 2.15–2.16nonresident agencies, 2.20offshore banks, 2.17, 2.19offshore enterprises, 2.17, 2.19regional central banks, 2.21shell companies, 2.18special purpose entities, 2.18See also Nonresidents

Residual maturity, defined, 6.6, App. IIIResidual values, treatment of, App. I (Part 2)Reverse security transactions

debt statistics compilation, 13.29–13.30defined, 3.31, App. II:1memorandum table, 4.14–4.15recording, App. II:20sale of, 3.32securities lending, App. II:13–App. II:19See also Repurchase agreements

Reverse transactions, projected payments, 6.35Revolving underwriting facilities, 9.8, App. I (Part 1)Rights accumulation program, defined, App. IIIRisk, contingent liabilities and, 9.21–9.22RUFs. See Revolving underwriting facilities

SAF. See Structural Adjustment FacilitySDDS. See Special Data Dissemination StandardSector classification, defined, 3.2, App. IIISecurities

asset-backed, App. I (Part 1)index-linked, App. I (Part 1)interest cost accrual, 2.73location of issuance, 6.21, 7.52–7.54mortgage-backed, App. I (Part 1)stripped, App. I (Part 1)with embedded options, payment schedules for, 7.13–7.15See also Traded securities

Securities lending, 3.31, App. II:13–App. II:19Security identification code, Box 13.1Sell-/buybacks, 3.31, App. II:1Service-related debts, projected payments, 6.32Services

as debt repayment, 2.38prepayments, App. I (Part 2)

Shell companies, residency of, 2.18Short-term commitments, defined, App. IIIShort-term debt

defined, 2.53, App. IIIexternal debt, 6.7–6.8

307

Index

international reserves-to-short-term debt ratio,15.26–15.29

monitoring, 12.23–12.27Short-term remaining maturity, 6.7, 7.5–7.7SIL. See Specific Investment LoanSolvency, 15.4–15.5Sovereign bonds, restructuring, Box 8.1Special accounts, defined, App. IIISpecial Data Dissemination Standard, Box 4.1Special purpose entities, residency of, 2.18Specific Investment Loans, 19.28SPEs. See Special purpose entitiesSpot rate, exchange rate conversion, 2.52Stand-By Arrangement (IMF), defined, App. IIIStand-by credit, defined, App. IIIStandstill, defined, App. IIIStatistics

coordination among official agencies, 10.4–10.10debt-service payments, 11.12–11.13disbursements data, 11.10–11.11dissemination of external debt statistics,

10.23–10.25, 17.1estimating position data with transactions

information, 12.36legal backing for data collection, 10.12–10.15resource allocation, 10.11technical assistance, 19.1–19.29See also specific countries

Stock figures, defined, App. IIIStock-of-debt operation, defined, App. IIIStock rescheduling, 8.12Straightline interest, interest cost accrual, 2.67, 2.69Stratified random samples, debt statistics compilation, 12.14Stress test, defined, App. IIIStripped securities

classification of, App. I (Part 1)interest cost accrual, 2.77–2.80measurement, 2.61

Structural Adjustment Facility, defined, App. IIIStructured bonds, classification of, App. I (Part 1)Structured floating-rate notes, classification of, App. I (Part 1)Subordination strategy, defined, App. IIISupplier’s credit, defined, App. IIISwap contracts, 3.25Swaps

classification of, App. I (Part 1)cross-currency, 7.32debt, App. IIIdebt-for-charity, App. IIIdebt-for-development, App. IIIdebt-for-equity, App. IIIdebt-for-nature, App. IIIdefined, 3.25gold, 3.31, App. I (Part 1)total return, App. I (Part 1)

System of National Accounts 1993, 1.7, 2.11

TAL. See Technical Assistance LoansTechnical arrears, 3.37Technical assistance in external debt statistics,

19.1–19.29Technical Assistance Loans, 19.29Technical cooperation grants, defined, App. IIITerms-of-reference rescheduling, defined, App. IIITFFS. See Inter-Agency Task Force on Finance StatisticsThird-party guarantees, 2.30Tied-aid loans, defined, App. IIITime of recording, 2.22–2.29Toronto terms. See Concessional restructuringTotal official flows, defined, App. IIITotal return swaps, classification of, App. I (Part 1)Trade credits

classification of, App. I (Part 1)defined, 3.27liabilities, 2.38OECD data reporting, 17.31

Trade finance, monitoring debt, 12.24, 12.27Trade-related credit

defined, 6.9–6.11cross-border, 7.55–7.56

Traded debt instrumentsdata model for calculating debt statistics,

12.46–12.56location of debt securities issuance, 7.52–7.54market valuation, 2.42–2.44reconciliation of nominal and market value, 7.50–7.51

Traded securitiesCoordinated Portfolio Investment Survey, 13.35–13.36debt statistics compilation, 13.1–13.9issues of securities by residents in foreign markets,

13.26–13.28mismeasurement, 13.31–13.33nonresident investment in domestically issued

securities, 13.10–13.25periodic position surveys, 13.34securities involved in reverse security transactions,

13.29–13.30security databases, Box 13.1

Tranches, 2.76, 18.18–18.19, App. IIITransfer arrears, 3.37Transfer clause, defined, App. IIITransfer risk, defined, App. IIITransfers, defined, App. IIITreasury bills, classification of, App. I (Part 1)Treaty on Monetary Union, Box 14.1Turkey, country case study, 14.176–14.185

Uganda, country case study, 14.186–14.207Ultimate risk concept, 9.25–9.29UNCTAD. See United Nations Conference on Trade and

DevelopmentUndisbursed

defined, App. IIIloan commitments, 9.6

308

Short-term debt (continued)

Index

Unit-of-account-linked debt, 12.38United Nations Conference on Trade and Development

Debt Management and Financial Analysis System,18.1, 18.9–18.49

technical assistance, 19.17–19.20Unrecovered claims. See Claim paymentsUpper-middle-income countries, defined, App. IIIUse of IMF credit and loans, classification of, App. I (Part 1)

Valuation, 2.31–2.49face value, 2.33market value, 2.34nominal value, 2.32nondebt instruments, 2.45–2.49nontraded debt instruments, 2.35–2.41traded debt instruments, 2.42–2.44

Value date, 2.23Variable-rate bonds, classification of, App. I (Part 1)Variable-rate external debt instruments, 6.15–6.17Variable-rate instruments, 2.32, 2.82–2.87

Variable-rate notes, classification of, App. I (Part 1)Variation margins, App. II:10Vostro accounts, App. I (Part 1)VRNs. See Variable-rate notes

Warrants, classification of, App. I (Part 1)World Bank

comparison with balance of payments/IIP data,17.51–17.62

comparison with OECD data, 17.63–17.69Debtor Reporting System, 8.2, 17.1–17.2, 17.39–17.69technical assistance, 19.21–19.29, Fig. 19.1

World Bank Group, function of, App. IIIWorld Development Indicators, 17.39Write-offs

defined, App. IIIOECD data reporting, 17.33

Zero-coupon bonds, classification of, App. I (Part 1)Zero-coupon instruments, interest cost accrual, 2.66

309

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